Proactive fiscal policy is more important than monetary stimulus to stabilize the macro-economy by increasing domestic demand and consumption. This was the consensus of prominent Chinese economists at a crucial forum on Saturday.
At a time when China’s exports are expected to face great uncertainty, it is essential to increase certainty in terms of domestic demand, Shen Jianguang, chief economist from JD.com, noted at the Tsinghua PBCSF Chief Economists Forum in Beijing, which focused on China’s economic and policy outlook amid a turbulent 2022.
China’s export growth slumped to 3.9 percent year-on-year in April, marking its lowest level in almost two years, latest customs data showed. In 2021, China’s exports jumped 21.1 percent year-on-year, offering a big boost for the country’s economic growth last year.
This stark contrast is enough to indicate that the external climate has changed significantly in this year. The Federal Reserve began increasing interest rates due to skyrocketing inflation in America. This is expected to put great pressure on the US economy during the second half 2022. Meanwhile, the Russia-Ukraine conflict has hit the European economy very hard by exacerbating the region’s energy crisis.
“The possibility of a global recession next year needs to be taken into account, and the potential impact will be felt on Chinese exports this year,” Shen said.
The old growth model, which relied on external demand for economic growth, is no longer sustainable. China needs to drive domestic consumption more than it does by investing, Li Xunlei, chief economist of Zhongtai Securities, stated at the forum.
Li also noted that China’s large population has resulted in a large consumption market. This has contributed to the country’s rapid economic growth. The problem is that Chinese households spend more on home purchases and investment. It needs to be corrected through the implementation of appropriate policies.
Although it may seem obvious that China will launch some kind of stimulus program to address the risks and challenges, economists believe this time the stimulus should be different than flooding the market with excess liquidity through monetary easing.
Lu Ting, Nomura’s chief China economist says that China has very little room for monetary policy ease. China will need to take a more proactive fiscal policy and maximize fiscal spending to stabilize expectations.
If China had only economic problems, then monetary stimulus alone would solve the problem. Li pointed out that the Russia/Ukraine conflict and the epidemic are not economic issues, even though they have significantly impacted the sustainable development of China’s economy. Under current circumstances, economic tools such as monetary policy won’t be effective. Fiscal policy can, however, solve more structural problems.
Shen suggested that consumption vouchers could be used as a way to boost spending. This will not only aid in the short-term but also help to boost confidence.
Source: Global Times
