Leverage subdued inflation to accelerate demand-driven reforms, expert advises

As China moves to consolidate economic recovery and growth and expand domestic demand, Bai Chong-En, a member of the National Committee of the Chinese People's Political Consultative Conference and dean of the School of Economics and Management at Tsinghua University, said policymakers should seize the current low-inflation window to push through structural reforms — arguing that the current window of weak prices offers a rare opportunity to tackle structural imbalances.

In an exclusive interview with China Daily, Bai argued that China's economy is addressing a persistent mismatch between relatively strong supply and weaker demand, a dynamic that has kept prices subdued in recent years.

"When prices are weak, corporate profits are weak. When profits are weak, investment is weak. And consumption is weak as well," Bai said. "The imbalance between supply and demand is a key issue."

To address that imbalance, Bai advocated what he calls "investing in reforms" — using fiscal and monetary policies not only to stabilize short-term growth, but also to finance the transitional costs of deeper structural changes aimed at strengthening domestic demand.

The concept, he said, is consistent with his proposals last year to incorporate consumption into local government performance evaluations. Both approaches are designed to shift incentives toward expanding household spending, particularly in services, where Bai sees significant untapped potential.

Compared with exports and traditional investment, household consumption — especially service consumption — has more room to grow, he said. Demand for healthcare, education and cultural services is rising as incomes increase. Yet many of these sectors are heavily influenced by public policy support.

"Take healthcare as an example," Bai said. "The demand is there. The question is who pays and how they pay."

While China has employment-based and resident-based health insurance schemes, Bai argued that unlocking stronger health-related consumption requires further systemic improvements, which inherently demands fiscal capacity.

"You cannot complete reform overnight," he said. "Before reform becomes self-sustaining, you need to spend fiscal resources to support the transition. That is what I mean by investing in reforms."

He described such spending as an investment with long-term returns rather than a permanent fiscal burden. Once reforms are in place and institutions function more efficiently, extraordinary support would no longer be required.

He suggested that for China, inflation between 2 percent and 3 percent would be considered healthy. "If inflation is below 2 percent, it is too low. If it is significantly above 3 percent, it is too high," he said, adding that the current low-inflation environment creates space for policy action without risking overheating.

At the local level, heavy debt burdens remain a major constraint. As the country steps up efforts to defuse local government debt risks, Bai said reforming the local fiscal system to achieve a sustainable balance between revenue and expenditure is essential in the long run.

In the short term, however, he suggested the central government play a stronger role. Better coordination between fiscal and monetary authorities could allow the central government to raise funds at low costs in a low-inflation environment and channel support to localities.

Beyond the public sector, Bai emphasized that stabilizing the private sector is critical to boosting demand. Private investment decisions are closely tied to expectations about future prices and policy stability.

Clear policy communication and a predictable reform trajectory, he added, would help anchor business confidence. Expanding room for private participation in sectors such as healthcare, education and cultural industries would also support employment and income growth.

On emerging technologies, Bai said artificial intelligence has the potential to reshape service consumption by enabling more personalized offerings, such as tailoring learning programs in education or extracting insights from diagnostic data.

While recognizing that new technologies often bring periods of overly optimistic expectations, Bai said he "would not be surprised" if AI development experiences some volatility or bubbles.

Looking ahead to the 15th Five-Year Plan (2026-30) period, Bai expressed confidence in China's innovation capacity, particularly in manufacturing. But he stressed that innovation must be matched by stronger demand to ensure new supply generates sustainable returns.

"Innovation strengthens supply," he said. "But we also need to strengthen demand so that supply can be utilized and generate healthy returns. Achieving a better dynamic balance between supply and demand will be crucial for China's high-quality development in the next stage."