China’s commitment to continuous adaptation and structural transformation – Zhang Jun

In the wake of China’s shift away from its zero-COVID strategy, the government has recognized the need to address economic risks arising not only from supply shocks but also from weakening aggregate demand. This will require a change in macroeconomic policy, which previously focused more on the supply side.

At the same time, after examining the financial risks and environmental costs of the recent real estate boom, Chinese leaders have redoubled their commitment to the long-term goal of structural transformation. As a result, policymakers are trying to increase the flow of resources to more productive sectors, such as emerging technologies.

The government has certainly implemented a set of policies aimed at boosting domestic demand. However, this package is more subdued than the aggressive stimulus of 2009-2011, reflecting the dilemma facing Chinese policymakers: How to encourage spending by households and businesses without further inflating the housing bubble?

The Chinese government, of course, would not allow the housing market turmoil to turn into a systemic crisis and would instead introduce increased support measures to help stabilize it. But more importantly, the downturn in this sector is a reminder that China urgently needs to establish a long-term mechanism to ensure a more robust housing market. This is likely to prompt China to accelerate its real estate transformation to adapt to the new stage of growth the economy is entering.

Looking back over the past decade, China’s economy has already undergone significant structural changes as part of official efforts to shift toward higher-quality growth. In addition to the damage caused by the pandemic, much of the economic landscape has fundamentally changed. Sectors and people that have become accustomed to stability and easy profits increasingly find themselves in a less certain and more unknown environment.

Throughout this period, the Chinese government assessed the challenges facing the economy and systematically changed development policies to support structural adjustment. Policymakers were able to reach a consensus on abandoning the policy of massive stimulus measures to limit speculative bubbles and striving to maintain a relatively stable monetary environment at the macro level in order to strengthen the real economy.

This explains why China has consistently advocated an “intercyclical” approach to macroeconomic management, which means taking action faster, in smaller steps and with a long-term view. As former Governor of the People’s Bank of China Yi Gang noted in an April 2023 speech, China’s interest rate policy had already changed before the pandemic, with the PBOC adhering to the golden rule of the savings rate and the “easing principle,” which calls for caution in the face of uncertain circumstances. Avoiding volatile or excessive interest rates is crucial to suppress bubbles and create conditions for sustainable growth.

Of course, maintaining positive real interest rates is not without short-term costs. However, China avoided the huge shocks that can result from the accumulation of speculative bubbles. Moreover, despite any short-term setbacks, the government always seems to emphasize modernizing its policies to promote long-term economic development. This is important to keep in mind when trying to understand many of the current economic phenomena in China.

Fortunately, China has not experienced a depression in the past three decades, largely because its leaders have remained highly vigilant about the possible systemic risks associated with rapid economic growth. The government is also afraid of taking large risks out of a desire to protect particular interests.

China has faced countless challenges in its pursuit of economic growth in recent decades, but the government has largely overcome them by encouraging market players to continually adapt and adapt. For example, China’s entry into the World Trade Organization in 2001 did not result in mass unemployment as some expected. Instead, fears that “the wolves are coming” have spurred many sectors of the Chinese economy to become stronger and more competitive.

From this perspective, the Chinese government’s insistence on combining efforts to increase domestic demand with supply-side structural reforms is not surprising.

Zhang Jun, dean of the School of Economics at Fudan University, is director of the China Center for Economic Studies, a think tank based in Shanghai.