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China is expected to pursue an expansionary fiscal policy

Since November, financial experts and the media have been praising China’s supply-side structural reform as a cutting-edge solution to the country’s economic hardships. In fact, China’s economic problems are structural and long-lasting, so the country needs to concentrate on its supply-side structural reform, notwithstanding a probability of a slower GDP growth.      

As we know, GDP growth is ensured by means of interaction between demand and supply. For instance, investment in human capital gives the green light to innovation, which products boost demand and therefore economic growth. Frankly speaking, the demand-side policy as well as structur5al adjustment can hardly be regarded as exclusive. Well, growth of supply determines growth potential at least in aggregate terms, while growth of demand deals with the use of this potential. Respectively, in order to change the overall economic structure and growth pattern, the structure of demand should be changed first.       

As for China, here the supply side needs to be powered more by creation and innovation, rather than by raising inputs. Then, on the demand side, it needs to be driven mainly by domestic consumption, rather than exports and investment. However, this shift is very difficult to make, especially considering today’s structural factors, causing the country’s long-term potential growth rate to dip. The gloomy picture definitely makes continued structural adjustment a must-have tool in China.  

 

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