Enhancing economic resilience crucial in trying times

How should China strengthen the resilience of its economy? In April, the Trump administration announced a surge in global tariffs, triggering strong responses from governments around the world and causing sharp turbulence in financial markets.

Within three days of the announcement, global stock markets lost over $9.5 trillion in market capitalization, and volatility intensified significantly across bond, foreign exchange and commodity markets. In the United States, stocks, bonds and the dollar all fell simultaneously. The yield on 10-year US Treasury bonds also posted its biggest weekly gain since the Sept 11, 2001 attacks.

The shockwaves from the tariff moves continue to ripple across the world, with escalating confrontations on all sides. Faced with the Trump administration's high tariffs and erratic behavior, China must resolutely implement countermeasures. Any concession would only lead to further pressure from the other side. Only through firm resistance can space for negotiation and cooperation be created.

On April 25, a high-level meeting for the first time proposed coordinating domestic economic work and international economic and trade struggles, aiming to use the certainty of high-quality development to cope with the uncertainty of dramatic changes in the external environment.

On May 7, the People's Bank of China, the China Securities Regulatory Commission and other government authorities jointly introduced a package of incremental policies to stabilize market confidence.

On May 12, China and the US released a joint statement after economic and trade talks in Geneva, in which the US agreed to remove some additional tariffs, and China reciprocated accordingly, temporarily easing tariff pressures. However, over the medium-to-long term, challenges in Sino-US economic and trade relations persist.

It is worth noting that tariffs may not be the Trump administration's ultimate goal, but rather a bargaining tactic aimed at achieving the dual objectives of reducing the US trade deficit and maintaining the dominance of the greenback.

In fact, since the onset of the trade conflict in 2018, the US government has been exerting significant pressure and imposing extreme restrictions on China in both trade and technology sectors. We must be fully aware of the worsening international economic and trade environment in the foreseeable future and recognize that China and the US will continue their strategic contest for a long time.

So, against this backdrop, how should China enhance the resilience of its economy? We believe the most important approach is to focus on doing our own job well, remain self-reliant and persist in expanding domestic demand. At the same time, we must unswervingly expand high-level opening-up.

Expanding domestic demand is the top priority for 2025. Following the directives from the Central Economic Work Conference in December 2024, expanding domestic demand became the top priority of economic work this year.

This is because insufficient domestic demand is currently the main stumbling block in China's economy. In 2024, total retail sales of consumer goods grew by only 3.3 percent year-on-year, significantly lower than the 9.7 percent average between 2015 and 2019. From the perspective of the three engines of GDP — consumption, investment and exports — final consumption in 2024 contributed an average of only 2.3 percentage points per quarter to GDP growth, much lower than the 4.2-percentage point average between 2015 and 2019.

Breaking down the three factors influencing household consumption — changes in income, wealth and expectations — we find that in the short term, the main constraint on consumption growth is the sharp slowdown in household income growth since the COVID-19 pandemic.

In 2024, cumulative year-on-year growth in per capita disposable income was 4.6 percent in urban areas and 6.6 percent in rural areas, well below the 7.9 percent and 9.6 percent levels of 2019.

Over the long term, two main factors constrain consumption: first, weak expectations and confidence about future employment and income; second, evident imbalances in income distribution across households, the government and enterprises, as well as within the household sector itself.

Rising risk aversion among residents has led to an increase in precautionary savings, reflected in the sharp rise in new deposits and continued decline in new loans since 2022.

In terms of income distribution, profits generated by enterprises have not been sufficiently transferred to households, and the income distribution within the household sector also needs improvement. Beyond the income gap between urban and rural residents, an even more important issue is the much wider gap in property and social security entitlements.

To sum up, we believe that to stimulate consumption, macroeconomic policy stimulus is needed in the short term, while structural reform should be accelerated in the medium term. Based on the logic of moving from short-term stimulus to long-term reform, the following policy recommendations are proposed.

First, a more proactive fiscal policy and a moderately accommodative monetary policy are keys to driving a rebound in China's nominal GDP growth. The main issue facing the Chinese economy is insufficient aggregate demand and a negative output gap.

In the short term, to address the lack of domestic demand, central government finances should increase borrowing and spending to drive a rebound in consumption and investment. In addition to promptly implementing the expansionary policies outlined in the Government Work Report, additional stimulus measures should be planned for the second half, especially through greater issuance of special treasury bonds.

To make full and effective use of proactive fiscal policy, we recommend accelerating the issuance of the remaining quota of local government special bonds and special treasury bonds in the second quarter, and issuing an additional 2 to 3 trillion yuan ($411.6 billion) in special treasury bonds for the year.

Second, increasing short-term incomes for low and middle-income households through fiscal subsidies is advised. We recommend issuing universal consumption vouchers to encourage spending, especially among low and middle-income earners. To maximize the multiplier effect of consumption vouchers, they should be issued without being tied to specific products or services.

Third, lifting asset prices from the bottom can also help restore consumer confidence. On real estate policy, housing prices in core areas of the largest cities should be stabilized promptly, and support should be given to leading well-managed private developers.

All purchase and loan restrictions should be lifted to unleash demand from first-time and upgrading buyers. Special-purpose bonds should be issued to provide low-cost, long-term financing for high-quality developers.

The government can also purchase idle commercial housing in second and third-tier cities and convert it into rental-based public housing. In the stock market, efforts should be made to cultivate a long bull market.

In addition, with an aging population and slowing investment-driven growth, China's potential economic growth rate is trending downward. To reverse this trend and restore confidence among microeconomic actors, bold structural reforms are needed. These include reforms in income redistribution, education, healthcare, pensions, housing, development of a unified domestic market and support for private enterprises.

The writer is deputy director of the Institute of Finance and Banking of the Chinese Academy of Social Sciences.

The views do not necessarily reflect those of China Daily.