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Three Policy Focus Points to Resolve Economic Downward Pressure

May 05-2025   



*This article is based on the speech of Professor Huang Yiping, Peking University Boya Distinguished Professor, Dean of the National School of Development, Dean of the South-South Institute, and Director of the Digital Finance Research Center.

 

Causes of Economic Downward Pressure

The first cause is cyclical factors, which are generally associated with short-term changes such as economic crises, export disruptions, or emergencies like the COVID-19 pandemic. These can affect aggregate demand, leading to a slowdown in economic growth.

The second reason is structural. Rising income levels also mean rising costs, which, together with changes in many other factors, make it necessary to adjust the industrial structure accordingly.

The third reason is the trend factor. As the economy improves, a gradual decline in the growth rate is a normal phenomenon.

 

Response: A three-dimensional Policy Mix

There are three important policy dimensions for 2025: The first is the aggregate dimension, which involves the formulation of macro policies aimed at regulating aggregate demand, improving market expectations, and thus reversing the downward momentum of the economy; the second is the structural dimension, i.e., whether we are able to accelerate the construction and growth of new kinetic energies; and the third is the institutional or reform dimension, in which the implementation of reform policies is crucial and whose core purpose is to enhance the confidence of economic agents and improve the efficiency of resource allocation.

In the current situation, what we need to do is to work together in the three dimensions of macro policy, industry policy and reform policy.

 

Transforming the Role of Local Governments

In the short term, the most important aspects of reform policy are twofold: strengthening the confidence of entrepreneurs, especially private entrepreneurs, and improving the efficiency of resource allocation.

Against the backdrop of the many challenges and changes currently facing local finances, we can consider local government transformation as a key initiative in the next round of economic reform.

Specifically, it can include three aspects. First, by rebalancing the fiscal relationship between the central and local governments, we should resolve the long-standing mismatch between ministerial and financial power faced by local governments. Second, local governments have many responsibilities, such as attracting investment and formulating industrial policies. However, these tasks must be carried out within the constraints of their own balance sheet budgets. Third, local governments should focus on traditional government functions, namely providing public services, maintaining public order, and building infrastructure. They should also moderately invest and formulate industrial policies when conditions permit and budget constraints are clear.

As economic reforms deepen, some policies that were effective in the past need to be continued after a certain stage has been reached. The achievements of the past are certainly brilliant, but future development requires us to keep moving forward. Therefore, the transformation of local governments should perhaps be one of the key steps in the next market-oriented reform process.

Three Policy Focus Points to Resolve Economic Downward Pressure

May 05-2025   



*This article is based on the speech of Professor Huang Yiping, Peking University Boya Distinguished Professor, Dean of the National School of Development, Dean of the South-South Institute, and Director of the Digital Finance Research Center.

 

Causes of Economic Downward Pressure

The first cause is cyclical factors, which are generally associated with short-term changes such as economic crises, export disruptions, or emergencies like the COVID-19 pandemic. These can affect aggregate demand, leading to a slowdown in economic growth.

The second reason is structural. Rising income levels also mean rising costs, which, together with changes in many other factors, make it necessary to adjust the industrial structure accordingly.

The third reason is the trend factor. As the economy improves, a gradual decline in the growth rate is a normal phenomenon.

 

Response: A three-dimensional Policy Mix

There are three important policy dimensions for 2025: The first is the aggregate dimension, which involves the formulation of macro policies aimed at regulating aggregate demand, improving market expectations, and thus reversing the downward momentum of the economy; the second is the structural dimension, i.e., whether we are able to accelerate the construction and growth of new kinetic energies; and the third is the institutional or reform dimension, in which the implementation of reform policies is crucial and whose core purpose is to enhance the confidence of economic agents and improve the efficiency of resource allocation.

In the current situation, what we need to do is to work together in the three dimensions of macro policy, industry policy and reform policy.

 

Transforming the Role of Local Governments

In the short term, the most important aspects of reform policy are twofold: strengthening the confidence of entrepreneurs, especially private entrepreneurs, and improving the efficiency of resource allocation.

Against the backdrop of the many challenges and changes currently facing local finances, we can consider local government transformation as a key initiative in the next round of economic reform.

Specifically, it can include three aspects. First, by rebalancing the fiscal relationship between the central and local governments, we should resolve the long-standing mismatch between ministerial and financial power faced by local governments. Second, local governments have many responsibilities, such as attracting investment and formulating industrial policies. However, these tasks must be carried out within the constraints of their own balance sheet budgets. Third, local governments should focus on traditional government functions, namely providing public services, maintaining public order, and building infrastructure. They should also moderately invest and formulate industrial policies when conditions permit and budget constraints are clear.

As economic reforms deepen, some policies that were effective in the past need to be continued after a certain stage has been reached. The achievements of the past are certainly brilliant, but future development requires us to keep moving forward. Therefore, the transformation of local governments should perhaps be one of the key steps in the next market-oriented reform process.