China’s economy, the world’s second-largest, is at a crossroads. Post-pandemic recovery has been less robust than expected, leading to mounting internal and external challenges. A shift in China’s economic model seems inevitable, moving from a heavy reliance on economic stimulus to more sustainable, consumer-driven growth. This shift, however, raises fundamental questions about the efficacy of policy strategies employed over the past few decades.

For years, large-scale stimulus programs have fueled China’s economic growth. In response to the 2008 financial crisis, China announced a $586 billion stimulus package, primarily invested in infrastructure and property markets. This government-led investment model provided short-term economic stability but also caused an explosion in debt and led to overcapacity in industries like steel, cement, and property.

China’s response to economic slowdowns in 2012 and 2015 followed similar lines, with increased public spending, looser monetary policy, and directives encouraging lending to the corporate sector. These measures led to a further accumulation of corporate and local government debt.

The COVID-19 pandemic ushered in an unprecedented economic challenge for China. In response to the pandemic, China announced a stimulus package worth around $500 billion in 2020, notably smaller than other major economies. The focus of this stimulus was geared toward projects such as 5G networks, electric vehicle charging stations, and data centers, showcasing China’s intent to transition towards a digital economy.

The implementation of the “COVID zero” strategy also played a significant role, leading to a short-term halt in economic activities. However, the anticipated rapid recovery did not materialize as expected. Despite rate cuts and stimulus measures, the domestic economy has struggled to bounce back robustly. Unlike previous economic slowdowns where large stimulus packages effectively boosted the economy, the post-pandemic scenario has proven more complex. An overreliance on traditional stimulus methods might not yield the desired results, compelling a change in China’s approach to economic recovery.

Stimulus in crisis

The recent sluggishness of China’s economic recovery, despite repeated rate cuts and stimulus injections, raises concerns about the effectiveness of such measures. A glance at China’s property market, which saw a boom in past years primarily due to stimulus-driven investment, illustrates this conundrum. With consumer demand waning and a supply glut, it is in the throes of a slump. The debt crisis surrounding real estate giant Evergrande Group is a potent symbol of this systemic risk.