n December 12, the Central Economic Work Conference was held in Beijing. The annual meeting is a keynote event where the Chinese leadership sets the tone for its economic policy for the coming year. Given the uncertainty of the future development of the trade war with the US and the continued economic slowdown, this meeting, attended by Chinese President Xi Jinping, was particularly important.
During the meeting, the Chinese leadership highlighted that China’s economic policy in 2020 will be based on the principle of “progress while ensuring stability.” According to the statement issued after the meeting, the government will be devoted to ensuring the stability of people’s living standards, especially those vulnerable to the impact of the economic slowdown. In the meantime, the leadership pledged to continue pushing forward economic restructuring to seek an industrial upgrade.
The goals set by the leadership do not appear very surprising. But given the existing and potential challenges faced by China, the government needs to tread carefully in its fiscal and monetary policy.
First, the Chinese government should continue to refrain from resorting to monetary stimulus policies. Stimulus packages are the most direct way to promote economic growth, but they only work in the short term and are unable to alter the long-term economic trajectory. Many of China’s problems, such as debt, excess industrial capacity and an overheated real estate market, were caused by China’s past stimulus packages.
Second, the Chinese government should continue to increase spending on public services, particularly in the elder care sector and education. As China’s population ages amid a declining fertility rate, the country’s long-term sustainability is jeopardized and will require the government to take more assertive and effective measures.
Third, after the launch of massive tax reduction packages in 2019, the government should shift its focus on nurturing a transparent and market-oriented business environment. To ensure economic stability, the government needs to maintain the well-being of private Chinese businesses, especially small- and medium-sized enterprises (SMEs). It is estimated that the private sector, which accounts for about 60 percent of the entire economy, provides 80 percent of employment. The government should continue to use taxation and fiscal incentives to support the development of SMEs.
Finally, to achieve the much-desired economic restructuring, China needs to adopt a forward-
looking approach to push forward reforms, promote innovation through cutting red tape, streamline government functions and standardize government regulatory behavior.
2019 was a tough year for the Chinese economy, but 2020 could be even tougher given the
heightened strategic rivalry and economic confrontation, as well as lingering uncertainty. China needs both patience and determination to wade through the challenges it faces.