After a long period of investment-driven growth, China is finally changing its policy playbook. Having recognized the costs of relying on excessive credit growth in the medium term, now it is emphasizing tax cuts, further market opening, and incentives to boost consumption over investment. This means accepting lower growth rates in the future.
Yet, seven months into this shift, it is clear that these new policy measures alone will not be enough to stabilize growth at a sufficiently high rate. The targeted nature of the fiscal stimulus announced so far, together with regulatory efforts to limit the adverse side effects of earlier policy easing, suggest that the stabilization process will be longer and more arduous than expected.
There will be strong temptations to return to the old model as the economy adapts, but China’s leaders seem to accept that unless there are major negative shocks, they should not open the credit floodgates again to address cyclical weakness.
As a result, China must perform a difficult balancing act. It needs to keep growth high enough to maintain social stability, while also maintaining external stability, as reflected in the renminbi’s exchange rate. How China manages its currency during the policy shift could have important global consequences.
Other Asian economies faced a similar problem two decades ago. A central lesson from the 1997-1998 Asian crisis was that rigid exchange rates were incompatible with rapid, debt-driven growth.
Fueled by cheap debt, fast-growing Asian economies tried to maintain high investment rates for far too long. Their current accounts deteriorated, and growth slowed as their currencies remained pegged to a sharply appreciating dollar. Eventually they were forced to devalue their currencies as capital fled and foreign reserves dwindled.
In the wake of the global financial crisis, China managed to maintain high rates of investment growth only through rapid credit expansion. As a result, aggregate debt levels surged to around 270 percent of GDP last year from approximately 150 percent in 2008. Over the same period, China’s current-account surplus fell from 9 percent of GDP to less than 1 percent.
Because these high debt levels limit China’s policy options, the renminbi’s exchange rate could play a more important role in stabilizing growth than in the past, but the perceived political constraint on depreciating the currency to support growth, and the increasing role of the state sector in the economy, are adding to cyclical headwinds and making stabilization more difficult.
There are also uncertainties regarding China’s future growth model, stemming from Western challenges to Chinese participation in the global trading system and the inconsistencies between the old and new policy playbooks.
These uncertainties, in turn, create negative feedback loops. Risk-averse lenders shun private-sector borrowers because of a lack of good collateral and the implicit guarantees on loans to the state sector.
The role of the state naturally strengthens as the government tries to stabilize growth rates at lower levels.
A lack of alternative financial assets channels savings into the property market, but high-real estate prices force consumers to borrow more to buy property, crowding out consumption. And the bias toward infrastructure investment limits investment in services spending on education, healthcare, and financial inclusion, preventing the economy from producing what consumers want.
To be clear, the near-term risk of a Chinese crash or crisis remains low. Despite higher debt levels, China retains plenty of fiscal and regulatory tools to stabilize its economy. But, as with any major policy shift, the risk of accidents is substantial. The greatest risk concerns exchange-rate management, which is currently preventing China from using monetary policy to help stimulate the economy.
China currently is unwilling to ease monetary policy because it does not want the renminbi to depreciate, in part for geopolitical reasons but also due to its bad experience with currency flexibility in August 2015. But, following the sharp rise in debt over the past decade, debt-service costs are now equivalent to 70 percent of the total monthly flow of credit. Interest-rate cuts have become imperative.
If China fails to ease monetary policy to complement the fiscal stimulus, it risks falling into a trap similar to the one that ensnared its Asian peers in the 1990s. The best way for China to avoid a sharper, more destabilizing currency devaluation is to stabilize growth quickly, before doubts deepen about the economy’s longer-term trajectory.
China has embarked on a huge policy shift aimed at putting the economy on a lower-growth but more sustainable trajectory. How its leaders manage this transition is crucial for China’s future, and how well it performs its balancing act will have major implications for global stability.
Gene Frieda is an executive vice president and global strategist for PIMCO.
Copyright: Project Syndicate
With escalating US-China competition and mutual distrust, the trend of supply chain “friend shoring” in the wake of the COVID-19 pandemic and the fragmentation of the world into rival geopolitical blocs, many analysts and policymakers worry the world is retreating into a new cold war — a world of trade bifurcation, protectionism and deglobalization. The world is in a new cold war, said Robin Niblett, former director of the London-based think tank Chatham House. Niblett said he sees the US and China slowly reaching a modus vivendi, but it might take time. The two great powers appear to be “reversing carefully
Taiwan is facing multiple economic challenges due to internal and external pressures. Internal challenges include energy transition, upgrading industries, a declining birthrate and an aging population. External challenges are technology competition between the US and China, international supply chain restructuring and global economic uncertainty. All of these issues complicate Taiwan’s economic situation. Taiwan’s reliance on fossil fuel imports not only threatens the stability of energy supply, but also goes against the global trend of carbon reduction. The government should continue to promote renewable energy sources such as wind and solar power, as well as energy storage technology, to diversify energy supply. It
Former Japanese minister of defense Shigeru Ishiba has been elected as president of the governing Liberal Democratic Party (LDP) and would be approved as prime minister in parliament today. Ishiba is a familiar face for Taiwanese, as he has visited the nation several times. His popularity among Democratic Progressive Party (DPP), Chinese Nationalist Party (KMT) and Taiwan People’s Party (TPP) lawmakers has grown as a result of his multiple meetings and encounters with legislators and prominent figures in the government. The DPP and the LDP have close ties and have long maintained warm relations. Ishiba in August 2020 praised Taiwan’s
On Thursday last week, the International Crisis Group (ICG) issued a well-researched report titled “The Widening Schism across the Taiwan Strait,” which focused on rising tensions between Taiwan and China, making a number of recommendations on how to avoid conflict. While it is of course laudable that a respected international organization such as the ICG is willing to think through possible avenues toward a peaceful resolution, the report contains a couple of fundamental flaws in the way it approaches the issue. First, it attempts to present a “balanced approach” by pushing back equally against Taiwan’s perceived transgressions as against Beijing’s military threats