Chinese Growth Really Can Be Faster
Even as growth nears 6%, many Chinese economists oppose monetary and fiscal stimulus, citing everything from population aging to debt risk. But their arguments are far weaker than they seem – and far less convincing than the case for expansionary policies.
BEIJING – In November, I pointed out that, since the global financial crisis a decade ago, China has allowed annual GDP growth to fall gradually from over 10% to nearly 6%. While a decline was appropriate, I wrote, it is time to stem the slowdown with expansionary monetary and fiscal policies. Unexpectedly, my view sparked a heated debate among influential Chinese economists.
Many have rejected my proposal, offering a long list of justifications for their disagreement. For starters, they argue, China has tried to use fiscal and monetary expansion to stimulate growth before, with limited success. And with the Chinese economy having reached a “new normal” of slower growth, owing to long-term structural factors like population aging, there is little reason to believe that this time would be different. Expansionary fiscal and monetary policies might even make matters worse for China, because they could hamper supply-side structural reforms, such as by propping up inefficient “zombie firms.”
At best, my critics contend, monetary and fiscal stimulus would deplete China’s policy space, which isn’t exactly robust to begin with. Because China’s supply of broad money (M2) is already very high relative to its GDP, expansionary monetary policy would lead not to higher investment and consumption, but to inflation, asset bubbles, and heightened financial risk.
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