A former adviser to China’s central bank has warned of a “stagflation” if the country does not quickly adopt expansionary fiscal policies to spur domestic demand in the current economic slowdown.
Yu Yongding, an outspoken economist with the Chinese Academy of Social Sciences, was speaking amid concerns that China’s low inflation would further discourage investment or consumption.
“GDP has trended downward, largely on a quarterly basis, and the inflation rate is extremely low,” Yu told a room of Chinese economists at a forum hosted by the Shanghai University of Finance and Economics over the weekend.
“This is a reflection of insufficient demand. And if that’s the case, what policies should we adopt? It’s simple – an expansionary fiscal and monetary policy,” Yu said.
Despite signs of a slight rebound in China’s third quarter, deflationary pressure and weak domestic demand still loom large for its slowing economy, as a nationwide property downturn has dampened the prospects of a resilient recovery.
In its latest efforts to reinvigorate growth momentum, Beijing announced last month that it would issue 1 trillion yuan (US$140 billion) worth of sovereign bonds, which would bring the budget deficit to 3.8 per cent of gross domestic product (GDP) – up from the 3 per cent target set in March.
In addition, Beijing also allowed local governments to front-load part of their bond quotas for 2024.
Yu called for adopting expansionary policies as soon as possible to help stave off a more dire scenario involving stagflation – with the price of consumer goods rising while broad economic growth stagnates.
“Our room for expansionary fiscal policies is, in fact, very big,” he said.
He said China does not need to rigidly stick to normal practice on fiscal restraints, which cap the budget deficit at 3 per cent of GDP and sovereign debt at 60 per cent of GDP – the two rules on which the European Union was formed 30 years ago via the Maastricht Treaty.
“All developed countries have abandoned those two standards,” he said. “We still have a window for opportunity now. If we do not grasp it, and rather waste time, once this change happens, the Chinese economy could go into stagflation. It’s still not too late, now.”
China’s consumer price index (CPI) fell by 0.2 per cent in October from a year earlier, compared with a flat reading in September. Officials have repeatedly denied that the country has entered a period of deflation.
Yu also pointed to differences between China’s capital-market structure and those of developed countries such as the US, noting that China is overreliant on debts from its own banks, while the proportion of China’s economy being reliant on external debt is smaller than that of the US.
“In that sense, our financial situation is actually much better than most developed countries,” he said.
Yu also called for Beijing to reflect on policies that reduce overcapacity – one of China’s industrial goals after a 4-trillion-yuan stimulus package was used in 2008 and 2009 to counter the global financial crisis.
Without specifying which policies should be changed, he emphasised that efforts must be focused on getting people to spend money again.
“The real problem that we face is weak demand,” Yu said.
Yu also warned his peers of hastily pointing to an “L-shaped growth” in China’s economy – which predicts when the economy might bottom out and is characterised by a slow recovery rate with persistent unemployment and stagnant economic growth. The economy would take on a slow recovery, which would be indicated by the horizontal part of the “L” shape if plotted on a graph.
“We have not even seen the start of this horizontal line of growth,” he said. “If we think we can let the economy continue to flow as is, and not adopt expansionary fiscal policies to deter this trend, it could continue to go down.”
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