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China economy
This Week in AsiaOpinion
Donald Low
Donald Low

Asian Angle | Why China should allow diverse viewpoints of its economy to avoid risks of 3 biases

  • Without such diversity, Chinese policymakers could be blindsided by the biases of optimism, overconfidence, and omission
  • Markets work best when there is a diversity of ideas, including pessimistic and sceptical ones

Reading Time:5 minutes
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Cyclists rest against the skylines in Pudong, Shanghai on November 3. Photo: AP
Donald Low
After the US Federal Reserve chair Jay Powell gave the clearest signal yet that the United States central bank would begin to cut rates next year, investors responded by sending the benchmark S&P index to its highest level since January 2022.
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Even if the market rally is short-lived, this does not detract from the fact that the Fed and the US economy have surprised on the upside this year. In much of 2022, the Fed was criticised for having underestimated the risk of inflation during a pandemic in which the US monetary and fiscal policies were unusually loose. Some questioned whether the Fed can be trusted to bring inflation down this year having misjudged it so badly before. At the start of this year, many analysts also thought that it would take a sharp recession in the US to bring inflation down.

Faced with widespread pessimism and scepticism, the Fed needed to show credibility and commitment in tightening monetary policy while doing so in a gradual, measured way that avoided crashing the US economy. The Fed has probably succeeded in achieving this delicate balance: not only will the US escape a recession this year, but growth and the jobs market have been resilient.

China’s surprising slide

By contrast, China’s economy this year has surprised on the downside. The post-Covid rebound – widely expected after zero-Covid restrictions were suddenly lifted at the end of 2022 – failed to materialise in 2023. The property debt crisis remains unresolved and continues to be a significant drag on investor and consumer confidence. Interest rate cuts have been too modest to give meaningful support to the beleaguered property sector, much less spur a wider economic recovery. Consequently, the job market remains weak, wage growth is flat, and deflation remains China’s key macroeconomic risk.

Fiscal support has also been tepid; the Chinese state remains as adamant as ever against using cash transfers or enhancements to social safety nets to boost consumption. It is rather surreal to hear Chinese leaders sound more like right-wing politicians in the US when they pontificate on the evils of welfarism.

It was also recently reported that China’s state health insurance system lost 19 million subscribers in 2022 as rising premiums and co-payments put the scheme out of reach for many people. Premiums and co-payments have risen because local governments have become more stretched fiscally. When people have to save more for future needs – whether health or retirement – it also means that they have less disposable income with which to consume. Not only does this hold back the economy from recovering in the short term, but it also hinders China’s shift to a consumption-driven growth model.

The steps that the Chinese government did take to boost the domestic economy – for instance, the 31-point guidelines announced in July to support the private sector and the 1 trillion-yuan sovereign bond issue announced last month to finance infrastructure and disaster relief efforts by local governments – have so far had limited impact on investor sentiment and consumer confidence.

The case for a diversity of viewpoints

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