China's plenum must propose actions, not repetitive slogans

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THE writer is a professor at Cornell University, a senior fellow at Brookings, and the author of “The Future of Money‘

The mood in the country is gloomy. Indicators of domestic and external sentiment—household consumption, private investment, and foreign capital inflows—are anemic. Real estate values continue to fall and the stock market is in a slump, reflecting and fueling the sense that the economy is adrift and that the government either does not understand the gravity of the situation or has no plan to stem the rot. Or both.

The third plenary session of the Communist Party of China’s Central Committee, a major meeting that typically sets a road map for economic policies in each five-year cycle, is scheduled to take place next week. The government was expected to present a clear policy agenda and specific reforms, in addition to proposing short-term stimulus measures to support growth. Those hopes may be dashed.

Chinese Premier Li Qiang recently spoke of the need to address the symptoms and root causes of current problems. But he offered few solutions. The plenum will likely produce mechanical statements about continuing reform and opening-up. These statements will be a hit if the government fails to revive market-oriented reforms.

The government has resisted calls for monetary and fiscal stimulus, fearing it would create financial risks and add to its debt burden. To revive the economy after the pandemic, Beijing has issued a large amount of long-term government bonds to finance infrastructure and other spending. The central bank has eased monetary policy moderately, but credit growth remains weak. Private companies are unwilling to invest in an uncertain environment.

The government has also boosted production in some industrial sectors, an area where a command economy typically excels. Support measures have boosted sectors such as green energy and electric vehicles, which is in line with the goal of technological upgrading of the manufacturing sector.

It is proving harder to encourage households to consume more, as their confidence is low and they see their real estate and stock investments lose value. The focus on large-scale, capital-intensive production has limited employment growth, further dampening consumption. With consumption falling short of capacity expansion, deflationary pressures persist. As China seeks to export its way out of its problems, trade tensions with other countries are intensifying, adding to the gloom.

Governments’ ambivalence toward the private sector and their apparent hostility toward successful entrepreneurs have also damaged trust. Entrepreneurs are willing to take risks in exchange for the prospect of significant rewards. This calculus is upended if returns are capped, reducing private sector dynamism and stifling innovation.

The banking system appears healthy but does not channel resources to the most productive sectors of the economy. Banks have little incentive to lend to small and medium-sized enterprises, including in the services sector. Incentives and broader development of the capital market are a major priority.

Local governments are facing financial difficulties. They account for a large share of overall spending while the central government collects most of the tax revenue. This model, which was already broken, has become unsustainable as falling property values reduce local government revenue from land sales. At the same time, the central government has increased local responsibilities, including managing the consequences of developer failures.

China’s current problems are both cyclical and structural, and action needs to be taken on multiple fronts. Stimulus is not a panacea, but it can be an important part of the solution. The transition to traditional growth drivers such as real estate investment will take time, and the economy needs support during this process.

Targeted fiscal support for the poorest households and measures to strengthen the social safety net would be a good start. However, without a broader fiscal and financial reform plan and measures to restore private business confidence, stimulus measures will not be effective.

The Chinese government appears to have set clear economic goals, including rebalancing the economy toward services and more productive manufacturing, moving away from real estate as an engine of growth, and boosting household consumption. It now needs to develop a concrete plan to achieve these goals, provide a down payment with specific reform measures, and lubricate the process with well-targeted stimulus. Only then will public morale improve.