MNI INTERVIEW: China Should Prioritise Reform, Not Stimulus

Flagging market-oriented reform to boost the confidence of entrepreneurs, rather than relying on policy stimulus, should be a top priority for Chinese policymakers, as economic pain stemming from Covid persists and relations with the U.S. remain troubled, a prominent liberal economist told MNI in an interview.

“The Chinese economy faces two major challenges – the external shock from Covid and legacy internal issues… Covid simply exacerbated the existing slowing trend,” said Zhang Weiying, professor at National School of Development of Peking University. He called on authorities to repair the expectations of the private sector, whose creativity will be crucial to the economic outlook.

“The government should persist with market-oriented reform, with protection of private property and the rule of law paramount,” said the economist, well-known for his free-market advocacy.

According to the National Bureau of Statistics, private-sector investment declined in the first five months of 2023, the first such decrease on record. An uncertain environment has discouraged investment, which Zhang said was a bigger issue than access to funds for the private sector, given the availability of cheap credit.

ENTREPRENEURSHIP

Covid’s scarring effect will persist and impact the government’s credibility and household spending, Zhang added, noting the younger generation also experienced negative psychological trauma after the three-year lockdown. Zhang attributed the over 20% unemployment level amongst the young to the failure of small businesses which did not survive the pandemic.

Entrepreneurs’ pessimistic outlook could trigger a “vicious cycle” between investment and confidence, he said. “In the past few years, a climate of doubt towards free markets and entrepreneurship formed amid media reports and an official crackdown on big companies, such as internet platforms,” he argued. “This climate has made entrepreneurs nervous and even to question the country’s path, particularly as China is still developing the rule-of-law system.”

Zhang added that doubts over the free market and entrepreneurship lie deeply within China’s ruling ideology, noting that “exterminating capitalists” remains a principle of Marxism. “Therefore, Chinese entrepreneurs are always sensitive to any sign of policy changes,” Zhang said.

Entrepreneurs still want to innovate and invest in government-supported sectors, including high-tech and semiconductors, he continued.

CHINA-US

Geopolitics represents another challenge, particularly the relationship between China and the U.S. “In the foreseeable future, I am not optimistic about the improvement of relations,” he said. “It is unexpected, after such a big disaster like Covid-19 for the whole human race, that countries are diverging, rather than unifying,” he commented. “China and the U.S can hardly manage honest communications and their conflict now lies in ideology, not in interests, which is difficult to resolve.”

So long as conflict simmers, both countries will adopt defensive postures, Zhang said. China’s strategy of dual circulation and its long-standing ambition to become self-sufficient, are products of this defensive and protective stance.

STIMULUS

Even though the economy faces great challenges, Zhang insisted that policy stimulus would only offer diminishing rates of return and come with side effects, such as the creation of excess capacity.

“Stimulus based on Keynesian economics, aiming to shore up investment and consumption via moves such as cutting interest rates and adding liquidity, simply focuses on short-term outcomes and brings long-term side effects… consumers need market demand created by entrepreneurs,” he said. “Stimulus is like taking pills – it may kill the pain, but the effect will not last long.”

Stimulus does not work if investors lack confidence in the future, he said, insisting that the government should demonstrate a path toward market-oriented reform.