Yu Yongding argues that, beyond encouraging consumption, the Chinese government must ramp up spending on infrastructure this year

On March 5, at the opening of the annual meeting of China’s legislature, the National People’s Congress (NPC), Chinese Premier Li Qiang announced that the government’s target for GDP growth this year is around 5%. It is an encouraging target, but if China is to reach it, the government may need to adjust its policy approach.

Though China’s annual GDP growth reached 5.2% last year, it has been steadily declining, almost on a quarterly basis, since 2010. It does not help that China has been grappling with very low inflation and even deflation. The consumer price index grew by just 0.2% in 2023, while the producer price index shrank by 3%. This is in line with longer-term trends: Chinese CPI has been rising by less than 2%, on average, since 2012, and PPI has been in negative territory for the better part of the last decade.

The sooner China reverses these trends, the better. Otherwise, the cumulative impact of long-term structural factors like population aging, persistent “hysteresis effects” of past economic disruptions, and falling confidence will make it increasingly difficult – even impossible – to revive satisfactory growth. Fortunately, the window to robust recovery has not yet closed: with a more expansionary fiscal and monetary policy, China’s government can stabilize GDP growth at a higher level – around 6%.

Chinese policymakers seem to recognize the need for some fiscal expansion. According to its 2024 budget, which the NPC approved last month, the central government will increase its expenditure by about 4% this year, to CN¥28.5 trillion ($3.9 trillion). On top of CN¥4.06 trillion in government bonds, the government will issue CN¥1 trillion in ultra-long special treasury bonds, and CN¥3.9 trillion in local-government special-purpose bonds.

China’s government still anticipates that the budget deficit will be 3% of GDP – the same as last year. But its “augmented” deficit-to-GDP ratio, as defined by the International Monetary Fund, is set to reach 8.2% in 2024. This is a step in the right direction, but if China is to achieve, let alone surpass, its 5% growth target, it may need to go further.

Not everyone agrees. Some scholars oppose expansionary fiscal policy in China, arguing that the country should be shifting its growth model away from dependence on capital investment, and instead fostering private consumption. They might point out, for example, that final consumption amounted to just 53% of GDP in China in 2022, compared to 82.9% in the United States.

But this gap is attributable largely to differences in services consumption, which constitutes two-thirds of final consumption in the US, but just 43% in China, not least because the prices of services are much higher in the US than in China. Meanwhile, the share of total consumption expenditure that went toward goods (including catering) in China was 87.4% of the US share in 2022, even though China’s GDP is less than 70% that of the US.

In other words, the share of goods consumption in GDP is much higher in China than in the US. Moreover, in 2023, final consumption contributed a whopping 82.5% of China’s GDP growth, with total retail sales of consumer goods growing by 7.2% over the previous year. Add to this the persistent decline of fixed-asset investment’s share of GDP over the last decade, and it is clear that one should be wary of characterizing China’s current growth pattern as “investment-driven.”

Yes, China’s government should continue to promote consumption, not least to make the income distribution more equitable. But, whatever it does, consumption growth will almost certainly be lower in 2024 than it was last year, owing to the powerful post-pandemic base effect in 2023. Darkening China’s prospects further, real-estate investment – long a main driver of growth – continues to decline, having already fallen by 10% in 2022 and 9.6% in 2023.

More infrastructure investment is vital to offset the adverse effects of falling consumption growth and real-estate investment. And since infrastructure is a public good, and might not offer the kinds of large, relatively short-term returns private investors often seek, the bulk of financing for such investment must come from the government.

Since completing its CN¥4 trillion stimulus package in 2008-09 – a response to the 2008 global financial crisis – the central government’s contribution to infrastructure investment has been negligible, amounting to less than 1% percent of the total. Local governments contributed more – around 10%. But this is not only insufficient; it is also exacerbating debt risks for both local governments and real-estate developers, because when local governments invest in infrastructure, they must raise funds by borrowing at high interest rates and by selling land-use rights.

A back-of-the-envelope calculation indicates that the government’s planned expenditure for 2024 may fall significantly short of China’s infrastructure-financing needs. So, over the course of this year, policymakers may well have to adjust their approach – say, by issuing more government bonds than anticipated. Monetary expansion might also be needed, with the People’s Bank of China lowering its benchmark interest rate. One cannot rule out the possibility that the Chinese government will have to implement a sort of quantitative easing.

Achieving the government’s 5% growth target this year will not be easy. The target is achievable. But the government may need to pursue a more expansionary fiscal and monetary policy than it has planned.

Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. Copyright: Project Syndicate, 2024, and published here with permission.