A view of the skyline of Beijing's CBD area Photo: VCG

In recent years,MK sports Korea some foreign media have suggested that the decline in China's economic growth rate is inevitable, citing factors such as an aging population, decreasing return to scale and environmental costs. However, one cannot deny the potential for a technological revolution to mitigate the adverse effects of an aging population on economic growth. While everyone agrees that China cannot sustain an economic growth rate of around 10 percent indefinitely, no one could prove that the growth rate can only stabilize at 6 or 5 percent.

As a rule, while an economy grows on a long-term trajectory shaped by fundamental factors, it fluctuates around the trajectory with a cyclical pattern. The challenge for the economists is to judge, during the time when a slowdown happens, whether the slowdown is due to the shift of the long-term trajectory or just a short-term fluctuation.

Refuting pessimism

When the economy suffers from lack of effective demand, the growth rate of the economy will fall below its long-term trend. In many instances, expansionary macroeconomic policy could help the economy regain its growth momentum. If a slowdown were wrongly diagnosed as decided by fundamental and long term causes and hence inevitable, pessimism may rise, which in turn may significantly influence consumer spending and investor decisions, and cause the growth rate to fall unnecessarily.

From a macroeconomic standpoint, the economics community has increasingly aligned in its perspectives over the past year. There is now a consensus on the need for expansionary, even "unconventional," fiscal and monetary policies to boost effective demand. Nevertheless, disagreements persist among economists about the best approaches to implement these expansionary macroeconomic policies.

One major perspective emphasizes the importance of stimulating consumption as a means to drive economic growth. In response to challenges such as insufficient demand, some economists propose measures such as issuing consumption vouchers, reducing income taxes, and reforming the social security system. While these initiatives could potentially boost consumption to some extent, their effectiveness may be limited, and they might not adequately address immediate needs. Moreover, there is a risk that these measures could result in unintended consequences.

Another perspective is to stimulate economic growth by increasing investment in infrastructure. Traditionally, government-led infrastructure investment has been a primary tool for the government to conduct counter-cyclical adjustments. Based on historical experience, in situations of insufficient effective demand, infrastructure investment, as a policy tool for counter-cyclical adjustment, can have an immediate impact on the recovery of economic growth.

In my opinion, infrastructure investment in China is far from saturated. Given its fundamental, public-oriented, and long-term nature, we should not overly focus on the commercial returns of infrastructure projects. Instead, we ought to prioritize social benefits and their capacity to drive economic growth. Due to its foundational characteristics, infrastructure investment is less likely to contribute to overcapacity in various sectors compared with other forms of investment.

Some Western economists advocate for a shift from an "investment-driven" growth model to a "consumption-driven" growth model. However, it is important to clarify that a purely "consumption-driven" growth model does not exist. Economic growth is primarily fueled by three key components: capital, labor, and technological progress. The interplay of these elements drives overall economic expansion. While consumption alone cannot sustain economic growth, it can play a role when it involves investments in human capital. In scenarios where effective demand is lacking, increasing consumption can help elevate the growth rate to match the economy's potential. In this context, consumption can be viewed as a contributing factor to economic growth.

Unprecedented signals

To achieve a GDP growth target of around 5 percent, mitigate risks in the real estate sector, and address local government debt concerns, the central government needs to increase fiscal spending, raise the central government debt ratio, and issue various forms of government debt. Historically, China has maintained a cautious stance on deficits, with the deficit ratio typically remaining below 3 percent, significantly lower than that of major global economies like the US and Japan. Currently, the total debt of the Chinese government, including implicit debt, stands at 67.5 percent of GDP. In contrast, other major economies - such as the US, Japan, Italy, France, and the UK - have debt levels exceeding 100 percent. Additionally, China's household savings rate is notably high, and the country holds substantial net overseas assets and state-owned assets. Compared with other nations, the Chinese government still has considerable capacity for borrowing and increasing its deficit.

Evaluating a country's fiscal health should focus primarily on the sustainability of its finances rather than solely on the balance between fiscal revenues and expenditures. Specifically, the government's capacity to meet interest payments is crucial; as long as economic growth surpasses the interest rate, concerns about rising fiscal deficits and accumulating debt can be mitigated. The sustainability of public finances is closely tied to the rate of economic growth. If the issuance of government bonds stimulates economic growth, and if that growth outpaces the rate of debt accumulation, the fiscal situation may not only remain stable but could potentially improve.

The meeting of the Political Bureau of the Communist Party of China (CPC) Central Committee on September 26, 2024, emphasized the need to step up efforts to roll out incremental policies, further make policy measures more targeted and effective.

The Central Economic Work Conference on December 11-12 advocated for the implementation of "more proactive fiscal policies, a higher deficit-to-GDP ratio and issuance of ultra-long special treasury bonds," along with "moderately loose monetary policies, including cuts in the reserve requirement ratio (RRR) and interest rates at an appropriate time."

As stated officially, China is set to adopt a "more proactive fiscal policy and moderately loose monetary policy." These unprecedented policy signals suggest that "unconventional" expansionary fiscal and monetary measures can be anticipated in 2025. 

Growing confidence

At the beginning of the new year, multiple departments have intensively released economic policies for 2025. On January 3, the National Development and Reform Commission announced an increase in the issuance of ultra-long special treasury bonds, along with a series of measures to support implementation of major national strategies and build up security capacity in key areas. From January 3 to 4, the People's Bank of China held the 2025 work conference. The conference stated that it will implement appropriately accommodative monetary policy to create a favorable monetary and financial environment for stable economic growth. It would cut the RRR and interest rates based on domestic and international economic and financial conditions and financial market developments to ensure adequate liquidity, stable growth in financial aggregates, and alignment of the scale of social financing and money supply with the expected goals of economic growth and overall price levels. All of these measures have played a positive role in boosting market confidence.

The Central Economic Work Conference proposed "to roll out a private sector promotion law," "to conduct a specific campaign to standardize law enforcement involving enterprises," "to formulate a guideline for building a unified national market," "to promote the healthy development of the platform economy," "to reform the fiscal and tax systems in a coordinated manner," and "to deepen comprehensive reform of investment and financing in the capital market." With the direction of macroeconomic policy already indicated, the key to the success of macroeconomic regulation by 2025 will be how to boost the confidence of entrepreneurs and the initiative of local officials, as well as how to establish a reasonable incentive mechanism that encourages local governments and enterprises to pursue the maximization of investment efficiency.

It is believed that the upcoming 2025 two sessions will introduce specific plans to implement "more proactive fiscal policies and moderately loose monetary policies, as well as strengthen unconventional counter-cyclical adjustments." Additionally, measures to further deepen reform comprehensively and expand high-standard opening-up will be formulated, there is reason to remain confident in the Chinese economy's prospects.

The author is academic advisor to the CF40 and Member of the Chinese Academy of Social Sciences (CASS). [email protected]