Why China's economy is doing better than people think: PBOC adviser

• China can still meet its target GDP growth rate if fiscal stimulus is lifted, Yu Yongding wrote in Project Syndicate.
• The former PBOC adviser said deflation should help inject support into the country without fueling inflation.
• As consumption growth slows, the country needs to boost infrastructure investment.

While China may seem dead set on another year of economic crisis, its prospects are brighter than they appear, writes a former adviser to the People's Bank of China.

As long as Beijing leans on fiscal stimulus, the country is still on track to hit its annual GDP growth target of 5% this year, Yu Yongding wrote. Project Syndicate.

Beijing has already enacted policies that show its willingness to extend the stimulus, such as issuing $137 billion in government bonds last year. Recently, the bank reduced the capital requirements to increase $140 billion in economic liquidity.

Yongding's view differs from less optimistic projections such as the International Monetary Fund's 4.6% growth forecast. He appeared undeterred by high local debt and a volatile real estate sector, noting that these were manageable problems.

„The Chinese government has the necessary financial resources to meet these challenges head-on,” he wrote. „By implementing accommodative fiscal and monetary policies and pursuing meaningful reforms, China will be well positioned to reverse its decade-long economic slowdown by 2024 and maintain strong growth in the coming years.”

By 2023, Chinese consumption will account for 82.5% of GDP. But with this pace unlikely to be sustained — and with China's net export growth already slowing — Beijing will need to increase infrastructure investment by more than 10%.

For this reason, China's economy is facing double-dip deflation, with consumer and producer price indices in the red, Yongding wrote. That means Beijing can pump out substantial fiscal stimulus without worrying about inflation.

Therefore, China should set the inflation target at 3% to 4% and allow the PBOC to ease monetary policy. The central bank can also buy government debt in the open market Previously issued sovereign bonds Insufficient to fund infrastructure investment.

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

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