Should the government spend more on infrastructure or consumers to boost economic recovery? Here are what economists say

China's April retail sales fell by 11 percent, the biggest drop since April 2020. Restaurant sales dropped by twice as much.

Photo from CFP

Photo from CFP

By XIN Yuan


China’s economy faces more difficulties now than it did in early 2020, according to Chinese Premier LI Keqiang. Earlier this week, the State Council put forward 33 measures including tax cuts and infrastructure upgrades to encourage investment and stimulate consumer spending. During a video conference on Wednesday, Li urged officials to make every effort to support business, help families and accelerate reopening. All provinces should implement these measures as soon as possible, he said.

There is little consensus among economists on whether to prioritize investment or consumption. Some even argue for boosting the real estate market or de-clogging the supply chain. Here is what they say.

Argument for infrastructure

According to HU Dong'an of Oxford Economics, investing in infrastructure has always been good for the economy during past slowdowns. Expansionary fiscal policies improve market expectations and boost many industries at the same time.

High-tech projects with immediate consumer applications and long-term benefits, such as 5G stations and data centers, require the loosening of local government borrowing and issuing special bonds.

Consumer spending logic

The arguments for consumer spending are louder and more forceful, according to LI Xunlei, of Zhongtai Securities. He claims that stimulating consumer spending has better returns as worthwhile infrastructure projects become harder to find.

Peking University’s HUANG Yiping wants the government to “use everything in its toolbox.” That means expansionary measures such as lowering the interest rate while targeting industries, and even households, directly.

According to the National Bureau of Statistics, China's April retail sales fell by 11 percent, the biggest drop since April 2020. Restaurant sales dropped by twice as much. Many economists advocate simply giving 1000-yuan (US$150) directly to households, especially those in lockdown areas. Half of the 1000 yuan could be coupons to be used at local small businesses. The other half, cash.

Those on the other side of the consumer-spending argument are concerned that the money will have a limited impact as economic uncertainty looms. If someone is unemployed, deep in debt, or locked down, 1000 yuan won’t go very far. Reopening and dealing with unemployment should be of the highest importance. Consumer spending and investment will naturally follow.

Special attention should be paid to the supply chain. If factories and trucking companies are not at full capacity, recovery will be slow, even if demand is up.

Realty reality

A small group of economists argues that neither infrastructure nor consumption. WU Chaoming, an economist at Chasing Institute, wants to protect real estate which accounts for nearly 30 percent of China’s GDP.

XU Gao at BOC International advocates propping up the housing market. He argues that businesses directly hit by the pandemic will bounce back quickly and strongly. Sectors that are weak for non-pandemic reasons are the real problem and deserve special attention and support.

The real estate market cooled last year and the downturn has continued well into this year. Home sales dropped 30 percent in the first four months. Access to funding dropped to a five-year low in April. As the real estate market is deeply interwoven with the rest of the financial system, market confidence will take a very hard blow in the case of major credit events.

The government is walking a fine line between curbing speculation and supporting the market. Some long-standing buying restrictions that were recently removed are already reinstated, in some cases only a few hours after the initial removal. New real estate policies are likely to focus on avoiding default rather than relying on the housing market for growth.