Why Additional Policy Stimulus is Needed for Steady Growth
In recent years, China's economy has faced persistent downward pressure and weak demand, with macroeconomic policies generally exhibiting a proactive stance. Two preliminary judgments can be made regarding the intensity and effectiveness of recent macroeconomic stimulus policies: firstly, these policies have achieved positive results in stabilizing growth; secondly, these policies have not fundamentally reversed the continuous weak trend in economic demand.
The recently introduced series of stimulative macroeconomic policies are very necessary, and it is necessary for fiscal policy to not only promote the stability of the real estate market and local finances but also to coordinate with other policy adjustments to play a key role in regulating the distribution of national income, adjusting the direction of public resource allocation, and substantially boosting consumer spending. Additionally, it is essential to accelerate systemic and structural reforms in areas such as the household registration system, rural land property rights, and the status of private enterprises, to fundamentally address the long-standing issues of insufficient demand and economic downward pressure, thereby further consolidating the foundation for high-quality economic development.
The recently introduced package of loose policies has attracted widespread attention and achieved initial success. However, it has been proven that insufficient demand and downward pressure have existed for many years, and counter-cyclical macroeconomic adjustments have continued for many years. Why is there still a need for additional policy stimulus to stabilize growth? The author believes that an important reason for the difficulty in fundamentally addressing the issue of weak demand in recent years is that, compared with the previous demand shortages, China's economy is currently in a special state of dual internal and external imbalance, which requires systematic governance to promote economic rebalancing and lay the necessary foundation for subsequent high-quality sustainable economic development.
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Firstly, in recent years, China's economy has faced persistent downward pressure and weak demand. The most straightforward and authoritative evidence for this is the high-level dynamic judgment of the economic situation. For example, at the end of 2018, the Central Economic Work Conference stated that "the economy faces downward pressure." At the end of 2019, the Central Economic Work Conference pointed out that "the economic downward pressure is relatively large." After the significant economic fluctuations in 2020-2021, the 2021 Central Economic Work Conference further stated that "China's economic development faces three pressures of demand contraction, supply shock, and weak expectations." The 2022 Central Economic Work Conference pointed out that "the three pressures are still relatively large." In 2023, the economy rebounded significantly, but as pointed out at the end of that year's Central Economic Work Conference, the main difficulties and challenges faced by the economy are "insufficient effective demand." In 2024, it continued to point out "insufficient effective demand," and on July 30, the Central Political Bureau meeting emphasized that "there is insufficient effective domestic demand, and the economic operation shows differentiation," and on September 26, the Central Political Bureau meeting pointed out that "there are some new situations and problems in the current economic operation," while also proposing a proactive package of macroeconomic incremental policy guidelines. According to common economic knowledge, when demand is insufficient to a serious extent, it can lead to recession, and when counter-cyclical adjustments reach a certain intensity, they belong to stimulative policies. The obvious proactive stance and stimulative attributes of the package of incremental policies reflect the high-level judgment that the problem of weak economic demand is still fermenting.
Secondly, in recent years, macroeconomic policies have generally shown a proactive stance. Over the past 6-7 years, based on the tone of economic growth dynamics and insufficient effective demand, a series of supportive or stimulative macroeconomic policies have been introduced. Taking monetary policy as an example, from 2018 to September 24, 2024, various deposit and loan interest rates have been reduced eight times, and the reserve requirement ratio has also been reduced multiple times, with monetary policy tool variables being intermittently reduced, reflecting a proactive stance and supportive approach. Fiscal policy has also generally shown a proactive stance, manifested in the rapid upward trend of budgetary expenditures and the scale of the general fiscal deficit, such as the government's annual debt increment, which increased from an average of less than 2 trillion yuan from 2015-2017 to more than 8 trillion yuan in recent years, and the government's statutory debt ratio increased from 36% in 2017 to 56% in 2023. According to the wider口径 statistics of the International Monetary Fund (IMF), China's debt ratio has reached 83%. Other macroeconomic regulatory areas have also exerted varying degrees of effort, such as the policy tool-strong field of infrastructure investment, which, despite significant fluctuations during the pandemic, has generally maintained a relatively fast growth rate since the second half of 2018.
Regarding the intensity and effectiveness of recent macroeconomic regulatory stimulus policies, there are different views in academia and the market, with some researchers believing that the intensity of stimulus policies needs to be strengthened from different perspectives. The author believes that two preliminary judgments can be made: firstly, the aforementioned policies have achieved positive results in stabilizing growth; secondly, these policies have not fundamentally reversed the continuous weak trend in economic demand. Therefore, it is necessary to conduct a more in-depth analysis of economic growth issues and their causes, and on this basis, discuss more effective response policies.
The author focuses on the historical comparative perspective to observe the characteristics of recent demand insufficiency and the pattern of internal and external imbalance. For most of the more than 30 years since the reform and opening up, China's macroeconomy has usually faced the pressure of credit and investment expansion, mostly troubled by economic overheating and inflation, but the economic operation has also encountered at least four difficulties of demand insufficiency.
The first occurred at the beginning of the reform and opening up. In response to the economic expansion policy around 1978 that exacerbated the problem of economic proportion disorders, the central government implemented the "adjustment, reform, rectification, and improvement" eight-character policy in 1979. While the contractionary policy had a positive effect on economic rebalancing, it also led to weak demand in 1980-1981.
The second was the difficulty of total demand insufficiency faced by the economy in 1989-1990, with the economic growth rate falling to 4.2% and 3.9% in 1989 and 1990, respectively, significantly lower than the potential growth rate during the reform and opening up period.
The third occurred at the turn of the century when a relatively typical total demand insufficiency and deflation occurred after the construction of the socialist market economy with Chinese characteristics. The contractionary treatment for severe inflation in the mid-1990s was effective, but it was also accompanied some over-adjustment effects. The large-scale restructuring of state-owned enterprises created unemployment pressure in the labor market, and the impact of the East Asian financial crisis caused export difficulties. The superimposition of multiple internal and external factors led to a rare total demand insufficiency during the reform and opening-up period, with low economic growth and deflation pressure lasting for 4-5 years.
The fourth occurred at the end of 2008, when the global financial crisis冲击led to a sharp contraction of China's exports, a significant deterioration of the employment situation in the export-oriented economic departments of the coastal areas in the short term, and the economy faced the risk of total demand insufficiency. At that time, the international environment was conducive to cooperation among major countries to deal with the crisis. With the implementation of large-scale economic stimulus measures in China, the economy quickly recovered by the second quarter of 2009 and returned to high growth in the second half of the year.
Compared with the above four, especially the last two, which occurred under the background of the initial establishment of the open market system, the recent weak demand and insufficient growth momentum have multiple characteristics and have formed a new round of special internal and external imbalance.
The first is a longer duration. In the first thirty years of reform and opening up, the norm of the macroeconomy was driven by credit and investment, forming an economy that was slightly too fast and hot, and inflationary pressure. It is estimated that the total duration of the above four total demand insufficiencies should be within 12 years, with an average duration of no more than three years each. If calculated from 2018, this round of weak demand and insufficient growth momentum has been 6-7 years, with a significantly longer duration.
The second is a gradual downward trend or a "cold-type" recession. Except for significant fluctuations during the pandemic, compared with the previous rounds of supply and demand imbalances that led to a significant deviation of the economy from its potential growth trajectory, this round of insufficient demand is not characterized by a one-time sharp downturn in economic operations but is unfolded through the slow decline and continuous weakening of the actual values of the main relevant macro variables. This phenomenon has important positive significance, showing that China's economy has strong resilience, and it also indicates that the government's departments' cognition and understanding of the state and laws of macroeconomic operations and short-term regulatory capabilities have significantly improved. After the emergence of short-term economic downward pressure, they can quickly identify and take corresponding counter-cyclical regulatory measures to prevent a possible significant decline in the economy. However, this characteristic also objectively increases the difficulty of recognizing and paying attention to the new round of supply and demand imbalances, which may delay the timing of taking effective measures to address the root causes of demand insufficiency.
The third is the supply and demand imbalance accompanied by strong supply. The supply side of China's economy is generally in a more active and strong state, not only occupying a dominant position in many traditional manufacturing industries globally but also receiving widespread international recognition for its rapidly changing infrastructure construction. In addition, in recent years, China's industrial manufacturing and other tradable sectors have undergone a new round of industrial and technological upgrading, gradually forming import substitution and export competitiveness in some medium and high-end fields, and even taking a leading position in strategic emerging industries such as "new three items" (new energy vehicles, lithium batteries, and photovoltaic products). The coexistence of sustained weak demand and significant upgrading and competitiveness enhancement of the supply side defines the overall pattern of "strong supply and weak demand," constituting a very special total supply and demand relationship imbalance.
The fourth is the growth of surplus and the positive contribution of external demand. Unlike the situation at the turn of the century when external demand contraction exacerbated total demand insufficiency and during the global financial crisis when total demand was mainly dragged down by external demand fluctuations, exports have generally increased significantly during and after the pandemic, and external demand has made a good contribution to total demand growth, with the problem mainly lying in internal demand. From 2010 to 2018, the contribution rate of external demand to China's Gross Domestic Product (GDP) was a minimal negative number, and since 2019 (except for 2023), external demand has always made a positive growth contribution to total demand. Preliminary estimates show that the contribution rate of external demand growth in the first half of 2024 was about 14%, with the net export of goods and services increasing by nearly 30 billion US dollars in August, and it is expected that external demand will continue to have a positive impact on total demand growth for the whole year. However, the growth in net exports mainly driven by the surge in trade surplus has objectively formed a new round of surplus imbalance in China's economy in recent years, accompanied by unfavorable changes in the external economic and trade environment.
The fifth is the drag on internal demand due to real estate adjustment. The transformation of the real estate policy environment in recent years has led to a deep market adjustment and affected internal demand. From the perspective of investment, although infrastructure, especially manufacturing investment, has grown rapidly in recent years, real estate development investment has significantly declined, leading to overall weak investment. The sharp drop in real estate sales has had varying degrees of impact on the upstream and downstream of the real estate supply chain, leading to a decline in capacity utilization and prices in upstream building materials such as cement and rebar, and suppressing consumption in downstream industries such as furniture and home appliances. In the context of low economic vitality over the years, some local finances were already in a difficult situation, and the deep adjustment of the real estate market, accompanied by a sharp decrease in land transfer income, has made the finances of these places even more unsustainable, affecting the achievement of the "three guarantees" (ensuring basic livelihood, ensuring wages, and ensuring operation).
The sixth is the structural weakness of consumption that constrains internal demand. The average propensity to consume of Chinese residents in the second quarter of 2024 was 68.7%, significantly lower than 70.2% in the fourth quarter of 2019 before the pandemic and 71.9% in the fourth quarter of 2015. From January 2020 to July 2024, the nominal and real growth rates of China's total retail sales of consumer goods were 4.1% and 2.9%, respectively, compared with an average annual growth rate of 12.3% and 10.4% from 2010 to 2019, and 13.1% and 11.0% from 2000 to 2009. The contribution of China's final consumption growth to GDP growth has fallen from an average of 4.39 percentage points in the five years before the pandemic (2015-2019) to 2.65 percentage points in the last four and a half years (the first two quarters of 2020-2024). If compared internationally, China's household consumption rate and total consumption rate are significantly lower than those of similar economies for a long time.
The seventh is the pressure of new external imbalances. In recent years, against the background of the evolution of major power competition relations and the growth of China's surplus, the relatively calm situation in the traditional trade balance field during the pandemic has become a thing of the past, and a new round of external surplus imbalance is becoming a global issue affecting China's external environment. The recent surplus imbalance has shown a series of characteristics: the absolute scale of the current account surplus has reached a new high, but due to the significant increase in China's economic volume, the proportion of the current account surplus to GDP is still at a relatively low level of around 2%. The significant increase in the surplus is mainly reflected in goods trade, especially the manufacturing sector, with an average annual surplus scale of nearly 1.7 trillion US dollars from 2021 to 2023, an increase of 750.3 billion US dollars compared to the average of 949 billion US dollars in the three years before the pandemic. The surplus increment and growth rate of the high-tech sector in goods manufacturing have significantly exceeded the traditional sectors, and the proportion of China's goods trade surplus and manufacturing trade surplus in the global surplus has greatly increased or reached a new record. Against this background, the US and Europe have continuously increased the intensity of trade protectionist policies against China, and recently, trade disputes initiated by emerging economies and developing countries against China have also significantly increased.
A variety of factors have contributed to the rare pattern of dual imbalance mentioned above. First, the "scarring effect" of the pandemic, with consumption tendencies significantly lower after the pandemic than before. Second, the long-term accumulation of contradictions in the real estate development model has dragged down economic growth in a stage. Third, the income distribution structure needs to be adjusted, especially the low proportion of residents' income and the large income distribution gap, which restricts consumption, especially resident consumption. Fourth, the impact of the long-term distribution pattern of public resources. In recent years, the proportion of government fiscal budget revenue to GDP has been 26%, and the "four books" of the general public budget, government fund budget, state-owned capital operation budget, and social insurance fund budget together account for 33% of GDP. However, if factors such as state-owned enterprises, local government tax and fee exemptions, and public sector fixed capital depreciation are considered, the overall scale of resources concentrated in the public sector, measured by the proportion of GDP, should be more than 40%, which is not much different from the relative proportion of major developed economies.
From the perspective of the distribution of public resources, its dominant structural characteristic for a long time has been that most of the resources are invested in the supply sector to improve industrial technology levels and expand production capacity, with a relatively small scale of investment to support resident consumption capacity. Therefore, when the supply capacity is expanded and improved, it will objectively produce a mismatched contradiction with the relatively slow growth of domestic consumption. In the open environment of economic globalization, it is possible to alleviate the tension or contradiction caused by the above imbalance by expanding exports, to maintain a dynamic balance of supply and demand. However, as China's export scale expands and its global relative weight significantly increases in the new development stage, coupled with significant adjustments in China's manufacturing and export structure and the increasing complexity of external economic and trade relations, the difficulty of using expanded exports to adjust the above endogenous dynamic imbalance increases, and it is necessary to carefully judge the situation and adjust policies to cope with the current internal and external imbalance.
The above observations and discussions have a simple and clear policy implication, which is to promote economic rebalancing through systematic policy adjustments in response to the current internal and external imbalances and their causes. The recently introduced series of stimulative macroeconomic policies are very necessary, and it is necessary for fiscal policy to not only promote the stability of the real estate market and local finances but also to coordinate with other policy adjustments to play a key role in regulating the distribution of national income, adjusting the direction of public resource allocation, and substantially boosting consumer spending. Additionally, it is essential to accelerate systemic and structural reforms in areas such as the household registration system, rural land property rights, and the status of private enterprises, to fundamentally address the long-standing issues of insufficient demand and economic downward pressure, thereby further consolidating the foundation for high-quality economic development.