China advisers warn government against major stimulus to keep economy on track

Frank Tang

China should refrain from using a large stimulus to guarantee a specific growth target in 2020 and proceed with structural reforms to unleash its potential, government advisers say.

Levin Zhu Yunlai, former chief executive of China International Capital Corporation, told a financial forum on Saturday that “short-term problems are not hard to solve”.

But he warned: “Any [government] measures would have negative effects.

“New problems surface in order to solve old ones. It’s a matter of choice. In the long run, the economy should return to a market orientation,” the son of former premier and leading reformer Zhu Rongji said at the event in Sanya, Hainan province.

New problems surface in order to solve old ones. It’s a matter of choice. In the long run, the economy should return to a market orientation

Levin Zhu Yunlai

There is a growing consensus among policymakers that Beijing should remain calm and focus on domestic reforms rather than allowing the US trade war and global economic slowdown to distract them.

However, Yu Yongding, a senior researcher with the Chinese Academy of Social Sciences, recently called for a larger government stimulus to ensure economic growth stays above the 6 per cent mark next year.

He said that global market confidence was already declining and many central banks had already started loosening their policies.

On Friday a Politburo meeting chaired by Chinese President Xi Jinping concluded with a pledge to try to keep growth “within a reasonable range”.

However, it also restated previous commitments to build a well-off society next year and double the size of the economy compared with 2010 – something that most economists believe will require growth of at least 5.8 per cent.

Policymakers are expected to set 2020 a growth target of about 6 per cent at the Central Economic Work Conference next week, supported with a higher fiscal deficit ratio of about 3 per cent, more than 3 trillion yuan (US$426 billion) of local special bond quotas and an accommodating monetary policy.

But Zhang Yansheng, an academic researcher with the National Development and Reform Commission, warned that further policy loosening could bring new risks to the already indebted economy.

“China’s macro leverage [debt to gross domestic product ratio] has risen 114 percentage points in the past 10 years. I don’t think it can be used any longer,” he told a panel discussion at the forum.

“Will the current economic slowdown bring the chance to shift towards high-quality growth?” he asked. “From this perspective, structural reform is probably the most important thing for China in coming years.”

China’s macro leverage [debt to GDP ratio] has risen 114 percentage points in the past 10 years. I don’t think it can be used any longer

Zhang Yansheng

Chinese authorities have already ruled out an all-out stimulus or the use of tools such as quantitative easing or negative interest rates. But it remains to be seen how far they will push economic reforms.

Zhang Junkuo, deputy director of the State Council’s development research centre, said China’s underlying growth rate was declining and could only be maintained at a medium or high level by continued reform.

He highlighted the case of Cao Dewang, the boss of a major auto glass firm, who complained in 2016 that, labour costs aside, it was cheaper to make products in the US than China.

Zhang argued that China should address those issues by breaking monopolies and lowering the cost of energy, capital and logistics.

There was also a need to reform the social security and tax systems and overhaul financing and governance, he said.

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