China’s quest for fiscal expansion

Despite disinformation which now rivals the darkest days of the Cold War, the Chinese economy is moving toward a soft rebound and a set of large-scale fiscal and tax reforms to foster growth in the coming years.

CITING a Japanese “financial journalist,” the US-based Newsweek reported recently that “China’s economy not only expanded less than reported but also contracted in 2023.” Apparently, Newsweek thought it had a scoop.

Stunningly, dismissing all growth figures of China by global development banks, the Newsweek story relied on a piece by Tamura Hideo of Sankei Shimbun. The daily represents Japan’s ultra-nationalist farright, which seeks remilitarization, denies Japan’s atrocities in World War 2 and disputes the role of the enslaved “comfort women.”

And so it was that Hideo’s piece gained hideous popularity as it was recycled in international media. After all, why would a reputable international weekly be wrong? Yet, it was déjà vu all over again. Last summer, when Shanghai began to rebound, Newsweek reported that the megacity had turned into a “ghost town.”

Then its economic authority was Michael Yon, a geopolitical hitman with a preference for conspiracy theories, who recently popped up again at a Texas border rally blaming the Hispanic “terrorist migrants” and “Jewish money” for America’s problems, according to the very same Newsweek.

Today, there is a distressing pattern of methodical obfuscation even among the world’s leading news media. As economic reporting is increasingly subject to geopolitical agendas, the gap between realities and fallacies is deepening.

Toward a new fiscal regime in China

Without substantial backup to support consumption, consumption growth would likely be moderate in China in 2024, given the current outlook for real estate and confidence. Hence, the impending push for a proactive fiscal policy, coupled with a new round of fiscal and tax reforms, to boost consumption growth. Recently, this was coupled with the biggest-ever cut to key mortgage rates by China’s central bank to bolster the housing market.

Despite the real estate downturn, China met its economic growth target last year. With growth of 5.2 percent year-on-year, fiscal revenue exceeded $2.9 trillion in 2023, an increase of 6.4 percent from the previous year.

Since 2012, as part of the overall plan of deepening reform, China has embarked on a journey to establish a modern public finance system. In the past decade, the fiscal and tax reform has been gradually moving toward a reformed system. Now, these efforts are garnering greater momentum, as evidenced by the key economic priorities of the Central Economic Work Conference in December.

Since January, there has been increasing international interest in China’s reform efforts, in particular, to rethink the incentives it gives its local governments to support the economy. Meanwhile, top leaders are mapping out the biggest reforms for fiscal policy in a decade. Reportedly, upcoming reforms are expected to lay the foundation for the new institutional fiscal regime.

Challenging balancing act

In the past four decades, China’s impressive growth record has dramatically improved living standards and eradicated extreme poverty. But like in other industrializing countries, the growth has been accompanied by widening imbalances. Current challenges have their origin in the 2008-2009 Chinese economic stimulus of the $586 billion package — whose aim was to minimize the impact of the US subprime crisis-induced global financial crisis.

The stimulus did boost growth,

helping the Chinese economy to recover from 6 percent to over 10 percent growth by mid-2009. It also drove 50 percent of global growth, thus supporting the ailing West. However, the stimulus also contributed to a great surge in local government debt. In particular, investment in infrastructure and housing fostered rising debt among property developers, local governments, and local government financing vehicles.

Over the medium term, the goal of the impending fiscal policy reform is to improve the risk-sharing mechanisms between the central government and the local governments in order to close the fiscal gaps at the local level and reduce local governments’ dependence on land sales, as the International Monetary Fund (IMF) recently reported. The effort at fiscal consolidation is based on the reduction of off-budget investment and the execution of broad social security and tax reforms, including greater reliance on personal income taxes to foster equity.

After three years of de-leveraging in the ailing property sector, the Chinese economy is moving toward a soft landing in 2024 and normalization by 2025. But China is neither Japan in the 1990s nor America in 2008/2009. Despite large-scale deleveraging in the sector, home buyers in China are actually leveraging up, as Singaporean multinational bank DBS recently reported. Moreover, “China has plenty of savings and buffers; time to put them to use.”

In other words, Chinese consumers do not lack purchasing power. They are able to spend and increase their spending. But being cost-conscious, they have been cautious to do so, consuming moderately and saving excessively. There is thus a great need for broad structural reforms and adequate support to cushion the impact of the adjustment in the property sector — and to unleash the pent-up consumption capacity.

China will maintain fiscal expansion this year to spur an economic recovery, Vice Finance Minister Wang Dongwei said recently, reinforcing market expectations that government will boost public spending to lift growth.

Secular long-term potential

China’s structural potential remains remarkable. In the West, middle-class real income has stagnated for four decades. In China, there are 400 million people in the middle-income group, and that number could almost double in the next decade. Urbanization will likely create huge demand in sectors such as housing, education, medical and elderly care.

By 2030, an additional 240 million rural residents in China could migrate to cities. Among other things, that translates to great secular potential for investments to upgrade urban transportation and telecom infrastructure — which, in turn, means a substantial opportunity for domestic and global financial institutions.

By contrast, in the West, trade wars and geopolitics, coupled with xenophobia and unwarranted wars, have proved to be a costly distraction from requisite structural reforms in home markets.

What the world economy needs is successful growth transformation in China — and large-scale economic reforms within rather than futile foreign interventions by the West.

The original version of this article was published by China Daily on Feb. 26, 2023.