Control your own destiny or someone else will. - Jack Welch Summary The difference between the current policy easing (started in July 2018) and the previous easing cycles indicates that China’s economic policy had evolved towards a commitment to structural reform policy even at the expense of growth. Productivity growth is expected to improve under this “new normal” policy direction. But the market remains sceptical about Beijing’s willingness to make structural changes, as many of the new policy initiatives still look at odds with market-determined resource allocation. The real question, in my view, is whether market forces will work to improve China’s system, as conventional wisdom has assumed. What if the market fails?
In the past easing cycles (2008-2009, 2011-2012, 2014-2015), Beijing used the same bailout tool kit which contained subsidies for corporate investment, measures for boosting the property market, subsidies for household spending on durable goods and instructions for the PBoC to pump liquidity and cut interest rates significantly, for the commercial banks to engage in a lending frenzy, and for the SOEs and local governments to borrow and invest in infrastructure. The purpose was to boost growth quantity.
In this easing cycle, which started in July 2018, China has only used selective stimulus in the fiscal, monetary and regulatory fronts. This tactic is also designed to restore private-sector confidence1. Hawkish policy messages that insist on no wholesale reflation have often accompanied the targeted easing measures. This new easing approach shows Beijing’s commitment to prioritising growth quality over quantity via structural
reforms and debt-reduction. Table 1 summarises the policy difference between this and past easing cycles; massive liquidity injection is history (Chart 1).
1 See “Chi Time: What’s New in China’s 2019 Outlook?” 18 December 2018.