Opinion | Balance required on stimulus and reform for China economy

Beijing has convened the annual Central Economic Work Conference against the background of a slowing economy and an uneasy truce in the US trade war with China. Stimulus and reform are both likely to be on the agenda. With China’s economy now a more compelling global concern than ever, how the balance is struck will be closely watched. In his speech this week marking the 40th anniversary of reform and opening up, President Xi Jinping said the Communist Party must lift its performance to maintain the momentum of reform. The directions set by the conference will influence policy decisions.

Stimulus has been the response to past slowdowns in China’s economy, for example after the Asian and global financial crises in 1997 and 2008. The negative legacies, however effective stimulus might have been at the time, should not be forgotten. The hangover of the 1997 boost to infrastructure spending to support growth still weighed on the economy when then premier Wen Jiabao unleashed the 4 trillion yuan (HK$4.5 trillion) rescue package after the global financial crash. This newspaper said then that there were lessons to be learned from examples of overinvestment, overcapacity, waste and corruption that had plagued such spending in the past. One is that it ultimately becomes a drag on the benefits of the stimulus.

Nonetheless, history repeated itself in 2008. People are still haunted by the legacy of Wen’s grand plan, even though supporters said at the time it was the reason China became the first nation to rebound from recession. Many maintain today that a lot of issues facing China, including debt, the growth of the state sector, the rising cost of property, and white elephants such as overcapacity in the steel industry and in infrastructure, are all to do with that stimulus. There is already a big debate about the right kind of fiscal expansion. If China embarks on another Wen-style stimulus it may stabilise the economy in the short term but would make all the deleveraging efforts in the past meaningless and ultimately things more difficult.

A group of current and former government advisers has urged Beijing to accelerate reforms in innovation and private ownership protection to support long-term growth. These people, such as former World Bank chief economist Justin Yifu Lin, are generally seen as moderates, but they have taken the opportunity to say Beijing needs to take the long view and speed up reform. This is seen as evidence of caution about relying too heavily on stimulus in an uncertain global environment. As a result, in line with Xi’s urgings, it is expected the work conference will not only talk about stimulus to support jobs, consumption and manufacturing, but also about reform that further opens the economy and promotes innovation and technology.