Opinion: Stimulus and Reform: Tackling Economic Struggle

There has been an ongoing debate regarding the necessity and format of stimulus for the Chinese economy. Economist Liu Shijin advocated for a comprehensive economic revitalization package that fuses stimulus with reform to expand end-user demand and foster growth. This has ignited discussions amongst scholars and financial officials, with differing views on the matter. Some support consumer subsidies, while others argue against strong stimulus. Liu's integrated approach seeks not just immediate stability but also medium to long-term development, proposing "spending money to build new institutions," thereby boosting confidence among residents and businesses [para. 1].

Since the beginning of the year, China has shown generally stable economic performance with improvements, but new challenges have emerged, as noted in the Politburo meeting on September 26. These include operational difficulties for businesses, especially small ones, rising employment pressures, and declining fiscal revenues. To address these, various governmental bodies have introduced measures like enhancing support for large-scale equipment upgrades and consumer goods replacements. Financial policies such as reserve requirement cuts and new monetary policy tools have been announced to stabilize the capital markets. However, many believe the key to reversing low demand and confidence lies in fiscal policy orientation [para. 2].

There has been a continued call for aggressive fiscal policy in recent years, with a prominent suggestion being to stimulate consumption through consumer vouchers or direct cash disbursements. Liu's plan emphasizes differentiating between survival and development-type consumption and the need for government action in enhancing development-type consumption. Services like education, healthcare, and housing, which currently lag, must be improved to boost development-type consumption and expand domestic demand, thus calling for systemic reform [para. 3].

Liu's plan includes a noteworthy 10-trillion-yuan ($1.4 trillion) stimulus aimed at fostering economic growth within one to two years by issuing ultra-long-term special government bonds. It focuses on two main breakthroughs: improving basic public services for new urban citizens and accelerating development in small and medium-sized towns within metropolitan circles to promote urbanization. The ambitious goal is to double the middle-income group from 400 million to 800-900 million within a decade [para. 4].

Despite debates over the adequacy of the 10-trillion-yuan stimulus, the plan’s distinctive feature is its integration of stimulus with systemic reform. Some media have referred to it as the "10-trillion-yuan stimulus plan," but this label fails to capture its comprehensive nature [para. 5].

Various economic stimuli have been proposed by experts in recent years, with systemic reform often playing a part but lacking a strong link to economic measures. Liu's plan argues that reform, although typically slower-acting than macroeconomic policies, can yield immediate positive expectations and spur short-term growth. Implementing critical reforms sooner rather than later is essential to realize their full potential. The current priority is to accelerate the implementation of reforms proposed during the 20th Central Committee’s third plenary session to unleash China’s economic growth potential [para. 6].

Boosting confidence is paramount, making the efficacy of any measure—stimulation or reform—dependent on its ability to improve expectations. Thus, current policy shouldn’t just consider stimulus but also how to integrate it with systemic reforms to guard against risks, address challenges, and achieve high-quality development. Both stimulation and reform warrant a robust response and strategic resolve [para. 7].