Economic reforms must overcome hurdles

Editor's Note: Some analysts argue that China should not allow its economic growth to slow below 6 percent and it should adopt a strong expansionary fiscal policy with the support of a loose monetary policy to ensure its economic growth does not fall further. 21st Century Business Herald comments:

Such a view holds that the Chinese government has about $17 trillion in net assets at its disposal and $2 trillion worth of overseas net assets, which, it is argued, can provide a cushion. This argument has been raised every time the government has been asked to increase fiscal spending over the past decade or so. However, the value of assets held by the government does not remain unchanged, and when a country needs to sell state assets to support fiscal spending, the value of these assets usually falls sharply due to massive currency depreciation.

According to this argument, we should not overestimate the severity of local debt and the high corporate leverage ratio. This judgment totally ignores the fact that the local government, corporate and household sectors already have a high leverage ratio. Considering a steep decline in investment returns and the ever-rising amount of investment required for per unit of GDP growth, the continuous use of an expansionary policy to stimulate housing price rises and boost household sector leverage ratio will have undesirable consequences.

China does need to pay attention to its economic downward pressure and avoid the risk of drastic economic deceleration. This requires it to maintain its economy within a certain growth range, but it does not necessarily mean maintaining a specific rate. Instead, attention needs to be paid to indicators such as economic stability and employment. To this end, the country should flexibly use fiscal and monetary policies, but refrain from adopting an expansionary fiscal policy, which will create a crisis of confidence, making people no longer believe in market reform, but cause them to believe that the country still regards maintaining economic growth as a top priority.

China should cherish the room for structural reform and should not use up all policy space to ensure growth.