The recent shift in China's export price index has raised concerns among economists and policymakers alikeAs the country's economy gradually emerges from the shadows of stringent COVID-19 restrictions, many are analyzing the implications of the declining export performance and what it means for the nation’s economic landscape.

The structure of China’s foreign trade reveals that approximately ten percent of the nation's GDP is attributed to the export surplus of manufactured goodsIn this context, it is estimated that about one-third of the output from China's manufacturing sector is directed toward international marketsWith the world facing economic turbulence and potential trade blockages, multiple industries in China could confront severe overcapacity issuesRenowned economist Li Xintong emphasizes that as exports face increased pressure, the repercussions for domestic industries may push the country towards a challenging employment scenario by 2025.

In light of slower macroeconomic recovery signals in the first three quarters of the year, questions arise about the appropriate strategies to stabilize growth

Should the focus be on stimulating consumption, or is expansionary investment the answer? Historically, China's economic success has been significantly driven by investment and export-focused strategies, where investment accounted for over 40% of GDP, almost double the global averageHowever, despite many policies intended to elevate consumer spending, the structure of the economy remains characterized by relatively weak consumer demand and robust investments.

Yet, this approach is now evolvingThe efficacy of investment-driven growth is waning, as highlighted in recent national economic meetings identifying six critical challenges, including insufficient demand and industry overcapacityLi points to Keynesian theories suggesting that insufficient demand includes both weak investment and consumption, creating avenues for one to temporarily compensate for the otherHowever, this creates a dynamic where GDP may stabilize at the cost of underlying structural issues, such as persistent overcapacity.

Investing remains a "fast variable," particularly for local governments; however, amid a backdrop of declining returns on investment, reliance on this strategy reflects a cycle of increasing debt rather than sustainable economic growth

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He draws attention to another often-overlooked factor: excess capacity in infrastructureThe surge in spending on high-speed railways, subways, highways, and 5G infrastructure has exacerbated local government debts, while revenues from tolls and service fees fall short of covering the borrowing costs.

Li also indicates that the prolonged low contribution of consumer spending to the economy—paired with the high dependence on exports—poses significant challenges for several sectors grappling with overcapacitySluggish consumer responsiveness can be attributed to rapidly rising macro leverage rates that have led to diminished willingness to accumulate debt among households and private enterprisesA striking example is the recent decrease in mortgage balances and the onset of negative growth in private investment.

To counteract these trends, Li suggests embracing a more pro-active approach toward stimulating consumption—a challenging feat yet imperative

He underscores the importance of enhanced fiscal policy as a means to dismantle the bottlenecks in consumption growthShort-term incremental policies including a leveraged fiscal apparatus must be reinforced with comprehensive tax reforms to produce lasting changeHe proposes that under existing circumstances—marked by mounting debts among local governments—central authorities and state-owned enterprises need to take the lead in fostering economic resilience.

In light of previous government statements and potentially worsening external conditions, Li anticipates an increase in the national fiscal deficit ratio for next year, estimating it might rise to as much as 4%. This would facilitate significant expenditure adjustments earmarked for essential areas, including debt repayments and infrastructure development.

Moreover, Li posits that monetary policy must carefully balance objectives like full employment with the stability of the currency

Initiatives such as reducing interest rates or reserve ratios could still have room to navigate within the current framework, yet the interdependence of maintaining currency value against stimulating exports introduces further complexity to policymaking.

Critically, the employment fostered through a robust service sector and significant private sector investments appears to be an effective mechanism to drive consumer spendingSince 2013, there's been a decline in the labor force within manufacturing sectors, necessitating sustained growth in services to create jobs and maintain economic healthAs such, Li articulates the need for improving the investment landscape for private enterprises to heighten their profitability, thereby rejuvenating their investment appetites.

Li also calls attention to real estate dynamics, which have seen declining mortgage balances signaling caution ahead

It is crucial to reinforce policy measures aimed at stabilizing housing prices and ensuring adequate investments are funneled towards this sector to avert the kind of economic stagnation that has historically plagued other countries, notably Japan in the 1990s, when mismanaged policies led to prolonged deflationary environments.

On a long-term scale, Li advocates for transformative reforms in fiscal policy aimed at enhancing budget transparency and redistributing resources toward socioeconomic improvements for middle and low-income householdsHe highlights that the income distribution structure in China, wherein a significant portion of household disposable income is concentrated among the upper tiers, remains static over the last decade, indicating a missed opportunity for boosting consumption.

To enact change, Li stresses the need for a fundamental reconfiguration of the fiscal framework, addressing issues like taxation reform, particularly in terms of consumption taxes and personal income tax structures