China Continues its Stimulus- Is it the right move?

Published on Author mackayj17

Chinese Premier Li Kequiang announced recently that China will continue to try and return to the high levels of growth the nation was used to seeing in the last decade.

Despite several quarters of lagging growth, and multiple measures pointing to further slowdown in the Chinese economy, government officials are continuing to try and use stimulus measures to encourage further growth in the economy.

China hopes to encourage investment across the board, and bring back investors who have moved on from to more profitable ventures in other countries, such as Vietnam, which have benefited from increased investment in manufacturing – a key sector that drove China’s growth in the early 2000’s.

Speculation arises, however, as experts look at the effects of previous stimulus measures. Despite the governments previous efforts investment, production, and consumption are all trending south. Many experts, including Leland Miller, who recently lectured on the future of China’s economy, agree that continued stimulus will be ineffective, and that there is no way to reverse the continuing slowdown of economic growth.

China’s economy has been slowing down since late 2009. Chinese officials need to make drastic reforms in order to try and maintain even current levels of growth.

Many of China’s new measures will simply be delaying the inevitable – but it seems as though leadership does not want to acknowledge this impending economic shift. Growth needs to occur in small businesses and entrepreneurial activity. This could be difficult in an economy that has been traditionally focussed on large scale enterprise and infrastructure development. Reform is necessary, but there is doubt as to the viability major changes in the current Chinese political climate.

There are possibilities for growth in China’s future. but it’s leaders need to recognize areas for growth and make drastic reforms and changes for this outcome to be a possibility. Current stimulus measures need to be rethought as the economy transitions from a manufacturing based economy in to a consumer economy.



2 Responses to China Continues its Stimulus- Is it the right move?

  1. I wonder if they could target stimulus towards boosting consumption. Investment-oriented stimulus seems destined to further oversupply risks. The country needs a self sustain consumer base above most all else at the moment – yet whether that is feasibly attained through government stimulus is another question.

  2. As per several previous posts & comments, demographics and diminishing returns mean that feasible growth is lower, and that cannot be reversed. If China’s economy performs well, wages will of course rise — remember, that’s a very desirable outcome!! — but then the low-wages jobs will not return. (We should hope that Vietnam in turn sees wages rise and labor-intensive jobs move on to Bangladesh and eventually sub-Saharan Africa.)

    As to stimulating consumption, that’s easier said than done. For example, high savings rates reflect a lack of nationals systems to support older individuals. Until a national pension and national healthcare system are in place, lowering savings will be hard. But neither of those can be done overnight. Indeed, almost all “structural” measures have their impact over 5- or 10-year time horizons, not 2-3 years. Perhaps SOEs and other firms could be encouraged to pay dividends rather than build up reserves, but again that would require engaging the new monied elite to change their behavior.