Source: SCMP   Published: 2025-03-17

By Tianqi Xu and Shanshan Li

Since 2023, as China’s economic recovery from the Covid-19 pandemic has shown protracted weakness, a “Peak China” theory has emerged and reached its zenith during the second and third quarter of 2024. On September 26 last year, President Xi Jinping chaired an unexpected meeting of the Communist Party’s Politburo to discuss economic work.

After the meeting, the government enacted a series of stimulus policies aimed at addressing the causes of the country’s economic downturn. This was confirmed by Premier Li Qiang at the opening of this year’s National People’s Congress (NPC) in a speech outlining a package of measures intended to help hit a growth target of around 5 per cent.

One argument from sceptics is that China’s fiscal policy has not been expansionary enough, leading to a contraction in the economy and a downward spiral in prices. However, the fiscal stimulus package unveiled at this year’s “two sessions” is unprecedented, including a 4 per cent deficit-to-GDP ratio and a government deficit of about 5.66 trillion yuan (US$782 billion), an increase of 1.6 trillion yuan from last year.

Finance Minister Lan Foan has emphasised that the central government has sufficient reserve tools and policy space to address any uncertainties. This can be understood as being able to deploy additional fiscal policy if needed and ensuring all necessary measures can be taken.

The potential for consumption among China’s local governments and public has improved significantly. On the local government side, the 6 trillion yuan debt-swap programme approved in November appears to be gaining momentum, with Lan saying during an NPC press conference that implementation had reached the halfway mark.

In the residential sector, China has seen a significant decline in debt burden, with households’ loan-to-deposit ratio falling back to early 2017 levels.

As a result, China has a good chance to avoid deflation this year. Financial markets appear to be pricing this in, with the yield on China’s 10-year government bond back above 1.9 per cent for the first time since December. This is also in line with evidence from elsewhere – such as the United States encountering rising prices after its fiscal expansion to deal with the effects of the pandemic – suggesting there is no price target that cannot be achieved if the stimulus is in place and delivered in the right way.

Despite the positive signals appearing in the wake of the government’s stimulus measures, putting the notion of “Peak China” to rest must rely on timely, long-term institutional reforms, promoting scientific and technological innovation and breaking down barriers to development. “Further deepening reform comprehensively” was the theme of the third plenary session of the 20th Central Committee of the Communist Party, and this year’s government work report further supported key reform measures.

Another criticism of the “Peak China” theory asserts that China discriminates against the private sector. However, recent breakthroughs in communications and artificial intelligence, such as the rise of DeepSeek, show that China’s private sector can be globally competitive under the current economic and political system.

In addition, the government is promoting further measures to encourage and support the private sector. Xi attended a gathering of China’s leading entrepreneurs on February 17 and assured them of the government’s support for the private sector.

Meanwhile, the government work report called for speeding up the enactment of laws to promote the private sector and providing “institutional support for enterprises to participate in national decision-making on scientific and technological innovation and undertake major science and technology projects”.

Another criticism levelled by the “Peak China” argument is that China faces limitations on its financial system, with the sector accustomed to providing credit for the property sector and infrastructure and thus will struggle to ensure adequate credit is available when the economy is in transition. However, this is a misleading interpretation of the financial sector, given that Chinese commercial banks’ credit structure has changed significantly in recent years.

The latest People’s Bank of China report shows that more than 70 per cent of non-financial enterprise loans are now long-term, aiming to support the real economy. Meanwhile, discussions of technology, pensions, digital, green and other forms of finance in the government work report suggest China is prepared to further expand credit to these new economic sectors soon.

As for the stock market, China Securities Regulatory Commission Chairman Wu Qing announced earlier this month that the government would continue to encourage A shares-listed companies to focus on long-term development and provide better return for investors, attracting more long-term investment in A shares and strengthening regulations on illegal market behaviours.

Other important reform measures this year include rebalancing the revenues and spending of both the central and local governments and reforming the education system, all of which can provide further support for China’s economic growth for years to come. To bring the Chinese economy and global confidence in China back on track, it is crucial to ensure that every reform measure is implemented effectively and not an empty promise.

In a resolution following the third plenary session last year, the party said it would “work in concert from top to bottom across all departments and regions to set the tasks, timelines, and priorities for reform in a well-conceived way, and designate competent departments for implementing each reform initiative and clearly define their responsibilities”. How these reforms are implemented is worth watching closely.