Title:The Policy Choice of Steady Growth is A Trade-Off between Advantages and Disadvantages

The outbreak of the COVID-19 pandemic has caused an economic downturn，which is a global phenomenon. According to the International Monetary Fund (IMF)，the compound growth of the world economy from 2020 to 2023 is 2.4%，28.4% lower than the trend value from 2015 to 2019，of which China grew by 4.7%，down 30.0%，while the US grew by 1.7%，down 27.7% (both forecasts in 2023).

The economies of China and the US face a similar pattern of "two lows and one high". However，the situation in the US is characterized by low growth，low unemployment rate，and high inflation. Despite lower actual unemployment rate than the natural unemployment rate，the labor market remains tight，with overheating demand leading to a positive output gap. Meanwhile，China is facing low growth，low inflation，and high unemployment rate，with insufficient jobs，especially structural ones. The lack of demand points to a negative output gap. While China's short-term economic performance may be outshone by the US in certain respects，the potential growth rate of China remains significantly higher than that of the US. This suggests that the process of narrowing the economic gap between China and the US is still ongoing.

Unlike the overheating of the US economy and the return of high inflation，the negative output gap means that inflation is not a constraint on economic recovery after the transition from epidemic prevention，so that China has the conditions to increase macro-control and make good use of the normal space of fiscal and monetary policies to continue to provide necessary support for economic recovery. According to the IMF’s forecast，China’s economic growth rate will reach 5.2% in 2023，up by 2.2 % from 2022. Against the background of aggressive tightening by the Federal Reserve，the US economy grew by 1.8% in the same period，down by 0.3%.

Granted，this is not the whole story of China’s steady growth policy. At present，domestic economic operation is affected by the intertwining of structural，institutional and cyclical problems. An important part of the policy response is to comprehensively deepen reform and opening up，focusing on breaking down deep-seated institutional obstacles，better transform institutional advantages into national governance efficiency，and enhancing the endogenous growth momentum of the economy. Expanding domestic demand is also a key move. In terms of investment，the main purpose is to speed up the issuance and use of local government special bonds and drive private investment through public investment. In particular，an additional 1 trillion central government bond was issued in the fourth quarter and allocated to local governments through transfer payments. Among them，500 billion of them will be used up by the end of 2023 and 500 billion will be carried forward to 2024. This will help alleviate local financial constraints and enhance local investment and expenditure capabilities. In terms of consumption，on the one hand，China will continue to adopt the policy of stabilizing market entities during the pandemic，continue to reduce taxes and fees，preserve employment opportunities，stabilize income，and then stimulate consumption. On the other hand，China will unblock the economy around "being able to consume，daring to consume，and willing to consume" to solve the blocked points of the economic cycle. More importantly，we should combine the implementation of the strategy of expanding domestic demand with the deepening of supply-side structural reform，optimize the promotion mechanism of the virtuous cycle of employment，income distribution and consumption，and open up the jamming and blocking points of the economic cycle. It’s clearly not just a matter of expenditure.

In addition，the adjustment of the domestic real estate market and the sharp decline in local land transfer income are important reasons for the negative output gap of China’s economy in recent years. The Politburo meeting in July only focused on marginally optimizing real estate policies and formulating a package of debt reduction measures as measures to prevent and resolve risks in key areas. The Central Financial Work Conference at the end of October further pointed out that it is necessary to establish a long-term mechanism to prevent and resolve local debt risks，establish a government debt management mechanism compatible with high-quality development，promote a virtuous cycle of finance and real estate，and improve macro-prudential management of real estate finance，to build a new model of real estate development.It is imperative to accelerate the construction of a modern industrial system through scientific and technological innovation，the digital economy，green development and proactively cultivate new growth drivers to ensure sustainable and healthy economic growth.

Although this approach has already proven to be beneficial，in the near future，it may prove challenging to fully offset the decline in old kinetic energy，due to its limited foundation and humble beginnings. In summary，this steady growth is “supplemented by policy stimulus and mainly structural adjustment”.  Comparing with the measures to the Asian financial crisis in 1997 and to the international financial crisis in 2008，the recent efforts for steady growth have both advantages and disadvantages. The result of the Asian financial crisis was that China failed to achieve the goal of “ensuring that the national GDP growth rate is not less than 8% this year” and faced a deflationary trend in 1998 and 1999. But in 2000，state-owned enterprises turned losses into profits，after when economic growth returned to more than 8%，and China successfully joined the WTO at the end of 2001. In 2008，the response was “stimulus first，adjustment as a supplement”. China achieved a V-shaped economic rebound in 2009 and 2010，but rushed back down in 2011. In 2012，China’s economy was slumping after RMB exchange rate plunged beyond 8 per dollar，and the supply-side structural reform in 2015 to cut overcapacity. At the end of 2019，China is still emphasizing the continuous deepening of the impact of the "three period superimposed"，one of which is the “absorbing the effects of previous economic stimulus policies”.

From the above experience，structural adjustment may be painful in the short term，but effects of it are sustainable in the medium and long-term. Policy stimulus may have obvious short-term effects，but there are many medium- and long-term sequelae. This has important implications for studying and judging the current economic situation. China is going through a critical phase in its economic recovery and industrial upgrading，and while economic growth is important，proper policy response is also important. To stabilize growth in the next year，we must resolve three major challenges. The first is guiding expectation. We must strive to achieve the expected regulatory goals for various economic and social development，and strive to achieve economic growth and development that gives market entities a sense of gain and identity. The second is risk prevention. We must not only take effective risk reduction measures to defend the bottom line of systemic risk but also insist on treating both the symptoms and root causes to avoid falling back on the old path. The third is the competition between great powers. Whether China can do well its things and keep the economy operating within a reasonable range determines the strength of China in the major countries' relations.

The author is the global chief economist of BOC Securities