A Fiscally Low-Cost Solution to China’s Economic Challenges
Stimulating Entrepreneurship, Investment, and Economic Growth without Adding to Government Debt
The Chinese stock market has rallied recently in anticipation of another round of government stimulus. This is understandable, as the authorities have rolled out multiple monetary and fiscal stimulus packages to stave off deflation and boost gross domestic product growth. But with public debt already well above historical norms, there is limited room for further fiscal intervention without risking a future debt crisis.
Adopting a More Liberal Capital-Market Regime
Policymakers could take several steps to bolster investor and consumer confidence while maintaining fiscal discipline. First, adopting a more liberal capital-market regime that makes it easier for private-sector firms to be listed on domestic stock exchanges can boost investment beyond those waiting to launch an initial public offering (IPO).
Currently, Chinese securities regulators follow a paternalistic model, selecting firms they deem “suitable” for investors. This approach often excludes firms that are not yet profitable – a standard that would have disqualified global giants like Alibaba, Tencent, Amazon, and Tesla from going public in China at the time of their IPOs.
Shifting to an IPO system like that in the US, where regulatory oversight emphasizes accurate and complete disclosures rather than picking winners, could remove these barriers, enabling dynamic companies to access the funding they need to expand their workforce and increase investment.
Introducing a Statute of Limitations on Financial Crimes
Second, introducing a statute of limitations on financial crimes could significantly enhance investor confidence with minimal impact on government revenue. Far from encouraging or condoning corruption or tax evasion, setting a clear timeframe for prosecuting crimes or filing lawsuits would strike a necessary balance between ensuring accountability and maintaining economic stability.
This imperative is especially relevant in China, where, decades ago, it was nearly impossible to obtain permits, land, or funding without resorting to bribery.
Transparent and Consistent Policymaking
Third, transparent and consistent policymaking is essential for reducing uncertainties that deter domestic and foreign investors. China’s ban on after-school tutoring serves as a cautionary tale.
Before the ban was announced during the summer of 2021, the Chinese edtech sector had established itself as a global leader, leveraging information technology to offer scalable learning opportunities for children and adults. Many companies in the sector were publicly-traded unicorns with valuations above US$1 billion. But the unexpected policy shift dealt a major blow to the industry.
Correcting Imbalances in Favor of State-Owned Enterprises
Lastly, although Chinese laws ostensibly protect private property and private firms, entrepreneurs often view the playing field as heavily tilted in favour of majority state-owned enterprises, especially when it comes to funding access, government procurement, licensing, and regulation. Correcting these imbalances could unlock the potential of China’s private sector to drive growth and innovation.
Conclusion
None of this is to say that large-scale fiscal and monetary interventions are unnecessary. But the institutional reforms proposed here could stimulate investment, job creation, and innovation without imposing a higher burden on taxpayers or increasing government debt, thereby steering the Chinese economy onto a healthier and more sustainable growth trajectory.
FAQs
Q: What is the current state of China’s economy?
A: China’s economy is facing challenges, including a high public debt burden, which limits the government’s ability to implement further fiscal stimulus packages.
Q: What are some potential solutions to China’s economic challenges?
A: Policymakers could adopt a more liberal capital-market regime, introduce a statute of limitations on financial crimes, promote transparent and consistent policymaking, and correct imbalances in favor of state-owned enterprises.
Q: How would these solutions stimulate investment, job creation, and innovation?
A: By removing barriers to entry for private firms, enhancing investor confidence, and promoting a fairer and more predictable business environment, these solutions could unlock the potential of China’s private sector to drive growth and innovation.
Q: Are these solutions a substitute for large-scale fiscal and monetary interventions?
A: No, large-scale fiscal and monetary interventions may still be necessary in certain circumstances. However, the institutional reforms proposed here could provide a complementary and more sustainable approach to stimulating economic growth.