China, the world’s second-largest economy, has been facing a slowdown in its growth rate due to various factors, such as the Covid-19 pandemic, the trade war with the US, the debt crisis of its property sector, and the regulatory crackdown on its tech giants. The latest economic figures for the first half of the year show that China’s GDP growth rate fell to 5.3 percent, lower than the government’s target of 6 percent. How can China reverse this trend and achieve a more sustainable and balanced development?
China’s Policy Responses to Boost Growth
In light of the subdued economic performance, China has been quick to implement measures to stimulate growth and restore confidence. The government has placed a distinct focus on empowering the private sector and amplifying consumer spending, which are considered the main drivers of economic activity.
Some of the policy reforms that China has introduced in the past two months include:
- A comprehensive thirty-one-point plan by the Central Political Bureau to fortify the private sector, vowing to enhance the business climate, protect property rights, support innovation, and ease financing difficulties.
- A joint initiative by the Ministry of Commerce and thirteen other departments to champion augmented consumption in households, especially in rural areas, by expanding e-commerce, promoting new forms of consumption, such as online education and health care, and improving consumer rights protection.
- A series of tax concessions by the Ministry of Finance for enterprises and individual entrepreneurs, such as reducing value-added tax rates, increasing tax deductions for research and development expenses, and exempting income tax for low-income groups.
The People’s Bank of China (PBOC), the central bank, has also played an active role in supporting growth by cutting interest rates, lowering reserve requirement ratios, and injecting liquidity into the banking system. The PBOC has also announced that it will maintain a prudent monetary policy stance and avoid flooding the market with excessive money supply.
Challenges and Risks Facing China’s Economy
However, the effectiveness of these policies in genuinely reviving the economy and restoring confidence remains undetermined. While some of the government’s proposed policies seem promising on paper, others appear superficial or bureaucratic. For instance, some analysts have questioned whether the plan to support the private sector is sincere or merely a gesture to appease public discontent. Moreover, some of the tax incentives and start-up initiatives focus predominantly on minuscule-profit enterprises with limited financial thresholds, overlooking the significance of small and medium-sized enterprises (SMEs), which form the bedrock of China’s economy.
Additionally, China’s economy faces several challenges and risks that could hamper its growth prospects. One of them is the escalating debt levels of local governments, which have accumulated huge liabilities from financing infrastructure projects and social welfare programs. According to the International Monetary Fund (IMF), China’s debt-to-GDP ratio will reach 55.1 percent by 2023. However, this number could approach a concerning 100 percent when factoring in explicit and implicit liabilities from hospitals and schools.
Another challenge is the turmoil in the real estate sector, which accounts for about a quarter of China’s GDP. Prominent property developers such as Evergrande and Country Garden face financial difficulties due to falling sales, rising costs, and tightening regulations. Their default risks could affect other industries and heighten systemic risks for the financial system.
A third challenge is the uncertainty in the external environment, especially the trade relations with the US. Although both countries have resumed talks on resolving their disputes, there is still no clear sign of a breakthrough or a comprehensive deal. The trade war has hurt both sides’ economies and disrupted global supply chains. Moreover, China faces increasing pressure from other countries on issues such as human rights, cybersecurity, and regional security.
Need for Visionary Leadership and Economic Reform
Given these challenges and risks, some experts have speculated whether China might resort to a large-scale stimulus program similar to the one it launched in 2008 to counteract the global financial crisis. However, such a move could worsen China’s debt problem and create more imbalances in its economy. Instead, what China needs is visionary leadership that can promote economic reform and structural adjustment.
China’s economic model has relied heavily on investment-led growth, export-oriented manufacturing, and state intervention. While this model has delivered impressive results in the past four decades, it has also created many problems, such as overcapacity, pollution, inequality, corruption, and financial instability. To address these problems and achieve high-quality development, China needs to shift its focus from quantity to quality, from speed to efficiency, from inputs to outputs.
This means that China needs to:
- Reform its state-owned enterprises (SOEs) and reduce their dominance in key sectors
- Encourage more innovation and entrepreneurship in the private sector
- Enhance its social safety net and improve its public services
- Strengthen its environmental protection and green development
- Open up its market and foster fair competition
- Deepen its integration with the global economy and uphold multilateralism
These reforms are not easy to implement, as they require political will, institutional change, and social consensus. However, they are necessary for China to overcome its current difficulties and achieve its long-term goals of becoming a moderately prosperous society by 2023 and a modern socialist country by 2050.
