Why China's economy is doing better than people think, says a former PBOC advisor

• China can still manage to hit its target GDP growth rate if it boosts fiscal stimulus, Yu Yongding wrote in Project Syndicate.
• The former PBOC advisor said that deflation should help the country inject support without fueling inflation.

Although China looks dead-set on another year of economic distress, its prospects are brighter than they seem, a former advisor to the People's Bank of China wrote.

The country could still be on track to meet its annual GDP growth target of 5% this year, as long as Beijing leans into fiscal stimulus, Yu Yongding wrote in Project Syndicate.

Beijing has already enacted policies that show its willingness to expand stimulus, such as the issuance of $137 billion in government bonds last year. More recently, it lowered bank capital requirements to boost economic liquidity by $140 billion.

Yongding's outlook stands apart from less optimistic projections, such as the International Monetary Fund's 4.6% growth forecast. He also appeared undeterred by high local debt and an unstable real estate sector, noting that these are manageable issues.

"The Chinese government has the financial resources it needs to confront these challenges head-on," he wrote. "By implementing expansionary fiscal and monetary policies and pursuing meaningful reforms, China would be well-positioned to reverse its decade-long economic slowdown in 2024 and maintain robust growth for years to come."

In 2023, Chinese consumption accounted for 82.5% of GDP expansion. But as this momentum is unlikely to hold — and with China's net export growth already declining — Beijing will have to boost infrastructure investment by more than 10%.

For this reason, it helps that China's economy faces two-pronged deflation, with both consumer and producer price indices in the red, Yongding wrote. That means Beijing can inject considerable fiscal stimulus without concerns about inflation.

Therefore, China should set an inflation target of 3% to 4%, and allow the PBOC to ease monetary policy. The central bank could also purchase government debt on the open market if previously issued sovereign bonds aren't enough to finance infrastructure investment.

"To be sure, infrastructure investment tends to be unprofitable and does not generate significant cash flows, which is why such investments should be financed directly through government budgets," Yongding said. "But to ensure that China meets its infrastructure needs, policymakers must invest in efficient, high-quality projects."

According to Yongding, China's infrastructure is still behind in critical sectors, such as healthcare, education, and transportation. Some of its facilities lag behind even developing economies.