In a new Paulson Policy Memorandum, Bloomberg economists Tom Orlik and Fielding Chen recommend policies that will boost confidence in China’s economy, from consumer-focused fiscal stimulus to more transparency. They explain how China can foster growth while reducing bad debt. A cheat sheet:
- Fiscal stimulus targeted at expanding social services would boost short-term economic growth. Rather than a repeat of China’s huge 2008 public spending on infrastructure projects, which led to distortions and massive debt, the government should shift the spending focus to education, healthcare, and other social services. That would lift growth while supporting employment, raising incomes, and expanding the role of the services sector.
- Targeting deficit spending toward raising the spending power of low-income households would also create growth. Contrary to popular belief, China’s lower-income households actually have a higher propensity to spend. By targeting fiscal stimulus at raising their incomes, China would achieve a higher multiplier on economic growth and employment. A 1 percent of GDP fiscal stimulus targeted at the poorest 40 percent would boost GDP by 0.8 percent, creating more than 4.5 million new jobs.
- Despite increasing cases of financial stress, China is not caught in a debt trap. Despite a rising number of high-profile bond defaults, most of China’s borrowing is domestic, and its banks have stable funding, meaning that China’s financial system is not as vulnerable to sudden reversals in confidence as was the American system in 2008.
- Increased data transparency would benefit the government-implemented supply side reform agenda. Better information from the Chinese government, from data to more regular communications, will give investors the confidence to channel more credit to firms and sectors with higher returns, thus reducing the credit intensity of growth.
- If China wants to move toward a managed currency float, it must restore confidence in economic growth. A targeted fiscal stimulus and increased transparency could help. Of the 15 countries that exited from pegged exchange rates since 2000, only those with rising growth achieved a stable currency. A targeted stimulus and more transparency would help bolster confidence in China’s growth prospects—and China’s currency, as well.