While taking hold of the issues related to China’s economy, we must take more of a global perspective, Liu Yuanchun, vice-president of Beijing-based the Renmin University of China, argued in an op-ed for news portal hexun.cn.
Three questions about China’s economy feature prominently in its domestic discussions, Liu pointed out: Did the Q3 performance for 2019 count as increasing slowdown or slowdown amid stability? Of cyclical factors and trend factors, which are the causes of economic underperformance? Between the trade war and deepening domestic reform, which contributed more to the economic slowdown?
These questions are essential, as they touch on the economic slowdown and the main conflicts of China’s economy, he said, warning that focusing solely on short-term factors would cause policy miscalculations.
He then argued China’s economic slowdown is not an isolated case. In their reports for 2019, the OECD, IMF, and other international organizations said the global economic growth rate in 2019 will drop 0.6 percentage points y-o-y, and that of China by 0.4 percentage points. The global prospects for secondary industry is low, and the global PMI has been below the boom-bust line for four consecutive months. The US manufacturing sector has declined for two months in a row, and worse still, that of Germany experienced negative growth for two consecutive quarters.
These countries are obviously not pursuing key reform tasks, changing economic growth gears, or have a debt ratio like China, he said, but are instead experiencing a global phenomenon.
In designing its policies, China needs international orientation, he suggested. First, exchange rate policy is crucial. Despite the ongoing Sino-US trade war, China’s trade expanded by 5.6 percent. Considering that its trade shank by over 10 percent in 2014-2015 when there was no trade war, the current case is mainly because of effective exchange rate hedging.
Next is monetary policy. The reason is that Europe and the US are still easing monetary policies - even under the constraint of the lower limit of zero interest. While reducing their investment and financing costs and stimulating banks to lend more, this also provides space for their fiscal policies, as their governments can run huge deficits on the back of low financing costs.
Liu said that despite China’s talk of proactive fiscal policies, constraining factors include the ability of local governments to service debts. Lowered interest rates would free up fiscal space for local governments. Tax and fee reductions play a vital role, but corporate financing and investment costs could be still reduced. The most effective way is to cut interest rates, he added.
Facing a global bout of easy monetary policies, China should change its monetary policy from prudent to moderately easy to help adjust expectations and share some adjustment costs with other countries.
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