Keep Reforming

The author examines the present stage of China's economic restructuring. Official figures show the macro-leverage ratio is under effective control and the one-year benchmark rate has fallen, leaving the financial system awash with liquidity. Yet banks are hesitant to extend loans, local administrations resist taking action, and the central bank's money is not reaching the real economy. As a result credit is shrinking and private firms face steeper borrowing costs. Trade disputes between China and the United States have added outside pressure to a domestic slowdown, and opinions about where growth and policy are heading have split sharply. The author suggests that public confusion now exceeds what was seen during the 2008 global financial crisis.

Drawing on years of work inside the People's Bank of China, the author contends that the country should place domestic demand at the center of its policy. Dialectically, a more sober outlook makes it easier to build agreement on reform, and reform delivers more when it rests on a clear grasp of the stages China's development has passed through. The author argues that China should hold to market-oriented principles, press ahead with reform and opening up, and build a more favorable environment for business.

The argument is organized around four points. First, policymakers should accept a medium-to-high growth rate and abandon the pursuit of rapid expansion. Second, supply-side structural reform should continue in order to speed up economic transformation and adjustment and to release further dividends from reform. Third, long-term structural problems should not be mistaken for short-term cyclical ones, and external shocks may be turned into openings for reforms to property rights protection, state capital management, corporate governance, income distribution and social security. Fourth, when trade friction arises, a multilateral framework tends to be useful.