Whatever it takes? Economic policymaking in China in the context of a possible deflationary spiral
Series: Occasional Papers. 2517.
Author: Adrian van Rixtel
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Abstract
This paper discusses the challenges the Chinese economy has been facing and assesses the policy measures taken to mitigate them. The analysis starts in September 2024, when Chinese policymakers announced the largest package of stimulus measures in years, reflecting their concerns about the situation of the Chinese economy. This situation is indeed concerning, with a multitude of problems needing to be addressed. Economic growth has been declining, China is in mild deflation which could turn into a deflationary spiral, it has a severe property crisis and a concerning debt situation (with a large fiscal deficit according to IMF estimates). Moreover, the structure of its economy is unbalanced, with very low domestic demand, especially private consumption, and considerable industrial overproduction contributing to deflationary pressures. Furthermore, China has considerable demographic pressures, its banks – especially the smaller ones – have high non-performing loan ratios, partly due to loans to the property sector, and external risks have been growing, in particular those related to import tariffs and other trade restrictions imposed by the United States and the threat of even higher tariffs.
The paper discusses in detail the policy measures taken during September-December 2024 by a large number of policy bodies. The Chinese economic policy regime is very complex, with many political, administrative and government organizations involved and with many policy conferences. These, and their policy measures, are all explained carefully. Monetary policy measures adopted by the People’s Bank of China are discussed and assessed in particular. Next, given that several of China’s economic challenges are rather similar to those that Japan faced during its “three lost decades”, an increasingly common question is whether China will be the next Japan, or whether China will face a “Japanification” of its economy. My assessment is that the differences between China and Japan are larger than the similarities, and that China has a relatively large number of advantages compared with Japan during its crisis period. Nevertheless, China is certainly not yet out of the woods and much will depend on its policy response and economic developments in 2025.