Maroc - EURASIAREVIEW.COM - A la une - 19/Dec 01:11

Preparing For China’s Future Economic Challenges – Analysis

By Wei Hongxu China’s recent Central Economic Work Conference, when discussing the current economic situation, expressed the view that, on one hand, this year's social and economic development goals can be successfully achieved; on the other hand, it also issued a warning about the severity of the current economic situation. The conference pointed out that the adverse impacts of changes in the external environment have deepened, and the country's economic operations still face many difficulties and challenges. These include insufficient domestic demand, production and operational difficulties faced by some enterprises, pressure on employment and income growth for the public, and numerous risks. Considering the current economic performance and the conference's assessment of the situation of 2025, researchers at ANBOUND believe that even with further strengthening of macroeconomic policies, the economic outlook for next year remains far from optimistic. When compared to last year's Economic Work Conference's description of the situation, this year's meeting mentioned that the impact of external changes has deepened further, creating additional pressure on external demand and casting a shadow over economic growth, which has led to a greater emphasis on "domestic circulation” where the focus is on the issue of insufficient demand. However, the negative consequences caused by the imbalance between the supply and demand sides have further intensified. From last year's "local imbalances in supply-side capacity" to this year's "production and operational difficulties faced by some enterprises", and from last year's "unstable expectations" to this year's "pressure on employment and income growth for the public", these developments reflect the further evolution of the three major issues of "demand, supply, and expectations" that were discussed last year. These issues are now affecting business operations and residents' employment, and the "unstable expectations" around income have turned into the reality of "income growth pressure". In the view of researchers at ANBOUND, the decline in corporate and household income, i.e., profits and wages, is the root cause of insufficient demand. It shows that the economic situation is deteriorating further, making the problem of insufficient demand even more prominent. Moreover, although supply-side issues are no longer as prominent, they have not disappeared. The conference mentioned that the "incremental policies by the Central Politburo meeting on September 26 effectively boosted public confidence and led to a clear economic rebound". This means that the current economic stability and the achievement of this year's economic and social development goals are also the result of strengthened policies, rather than the result of enhanced internal economic momentum. Such economic stability and sustainability face significant challenges. It appears that the Central Economic Work Conference has identified expanding domestic demand as the focus of macroeconomic policy support for the economy next year. However, as researchers at ANBOUND previously warned, although the intensity of macroeconomic policies may reach an "unprecedented" level, the economic situation is not exactly optimistic. In the face of increased downward pressure on the economy, the strengthening of policy drive aims to support the economic downturn caused by insufficient internal economic momentum, rather than stimulate a rebound in economic growth. In the absence of internal economic momentum, economic growth can only come from the strengthening of policy-driven efforts. In fact, looking at the economic goals set for 2025 in the meeting, last year's goal of "promoting sustained economic recovery" has now been shifted to "maintaining stable economic growth". Even with "unprecedented" macroeconomic policy strength, the economic growth target has been set only as "stable", emphasizing the stability of employment and prices. This suggests the lack of internal economic momentum will become more severe next year. It is worth noting that this year's conference specifically mentioned, in terms of policy scale, the deepening of the understanding of the regularity of economic work. This is a reminder that the current downward trend in the economy is part of the cyclical development of the economy, and counter-cyclical policies may not be sufficient to reverse the trend in economic operations. Although policy has identified "consumption" as the primary focus for next year, from the demand side, next year's "three pillars" of growth will be reduced to just one, i.e., consumption. The "three pillars" here refer to the three main drivers of economic growth, namely consumption, investment, and exports. This year’s meeting set the target for external demand as "maintaining a basic balance in international payments". This means that, due to increasing external pressures, foreign trade and foreign investment will no longer be expected to contribute to economic growth through a "surplus". Instead, the focus has shifted to achieving "balance". This implies that economic growth will have to rely solely on domestic demand, and as long as external demand does not drag the economy down, the target will have been met. In terms of domestic demand, next year’s focus in investment will be on improving efficiency, which naturally limits the extent of investment expansion. This creates a clear distinction between next year’s macroeconomic policy and the "easing policies" of 2008, which were primarily centered around expanding infrastructure investment. After years of active fiscal policies, the returns and efficiency of government investment have significantly decreased. Further stimulating investment in the future is likely to result in more debt and additional ineffective assets, which will not contribute much to economic growth. If under conditions where external demand not dragging down economic growth and limited contributions from investment, the only remaining space to support economic growth lies in consumer demand. This time, more resources will be directed towards stimulating consumption, primarily through increasing consumption subsidies, raising the income of the mid- and low-income groups, and improving social security with the objective of enhancing consumption capacity. The effects of these policies are unlikely to be as direct as those of expanding government investment, but they will improve the way the government participates in economic activities and push the economic demand structure further toward consumption. Therefore, stimulating consumption is more likely to lead to a change in the demand structure, and its contribution to overall demand growth is likely to be limited. Although the Central Economic Work Conference has made stimulating consumption and expanding domestic demand a key priority for next year, the expansion of domestic circulation will require time. Relying solely on stimulating consumption as the leading driver will lead to short-term boosts, but in the mid-and long-term, it will still be a gradual improvement process. Despite the significant external pressures, ANBOUND’s founder Kung Chan pointed out that policies should maintain a balance between both domestic and external circulations. Over-relying on domestic circulation is not advisable; the balance among the "three pillars" should be preserved. In the context of unstable incomes and difficult business operations, domestic circulation cannot bear the full weight of economic growth in the short term. If external circulation is abandoned too easily, it could quickly lead China's economy into an imbalanced state. In the economic principle, when structural changes occur in the long-term factors affecting economic growth, the phase of rapid domestic economic growth has already passed. Future economic growth will face more structural challenges, requiring improvements in efficiency and the development of new productive forces to achieve high-quality growth. Therefore, fully expanding domestic demand is not solely focused on the demand side in policy, but still requires efforts on both the supply and demand sides, with the emphasis on stimulating demand. Although this year’s conference did not specifically mention supply-side structural reform, the repeated references to "coordination" implicitly suggest that, under the policy of expanding domestic demand, supply-side reforms must continue to be advanced to achieve a balance between total supply and total demand. At the same time, the new policy has shifted in its approach, particularly in renewing old growth drivers and revitalizing existing resources, replacing capacity reduction with capacity optimization. It also continues to focus on risk prevention policies, highlighting the need for the real estate sector to halt the decline, give attention to its stabilization, and establish a new model for real estate development. These measures reflect the balance between supply-side adjustments and demand-side expansion. In this regard, the policy to expand domestic demand outlined in the Central Economic Work Conference still differs to some extent from the strengthening of counter-cyclical adjustments mentioned in the previous Politburo meeting. The issues on both the supply and demand sides also suggest that the current complexity of the economy cannot be solved merely by artificially expanding domestic demand. This further indicates that, even with unprecedented counter-cyclical efforts on the demand side, the overall economic recovery may not rebound quickly. Instead, it is more likely to slow the pace of decline and help the economy stabilize more swiftly. Achieving the goal of stable economic growth next year will require increased policy efforts, but in the long-term, this may become increasingly difficult. Final analysis conclusion: For China, while further easing of macroeconomic policies is positive news for stabilizing the economy, the weaker the internal economic momentum, the more these policy efforts serve to prevent a sharp downturn rather than stimulate growth. The complexity of economic laws and the current economic situation suggests that the long-term downward trend in the country will be difficult to reverse quickly. Therefore, decision-makers and policy implementers of the market will need to have a more rational understanding and realistic expectations of the economic challenges ahead, while maintaining a proper balance between "stability" and "progress", as well as between domestic and external circulations. Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.