**Abstract**
Due to long-standing institutional flaws and extensive growth patterns, our economy and society have accumulated numerous practical contradictions and challenges. Reforms must be carried out in the context of sustained economic development, which means we need to effectively address these issues before moving forward with meaningful change.
A few people can directly feel these problems. First, the extensive growth model has led to excessive resource consumption, resulting in a severe shortage of key resources. We now heavily rely on critical energy and raw materials, which makes us vulnerable to external shocks.
Moreover, this growth model has caused high energy consumption and environmental degradation. The environment is deteriorating rapidly, with fundamental conditions for human survival—land, air, and water—being increasingly compromised. A recent report by a statistician highlighted the severity of pollution, even sparking a humorous exchange between Beijing and Harbin about visibility in public spaces.
Additionally, demand has weakened, and the growth rate has slowed. While total money supply has grown significantly—from a few trillion in 2001 to over 110 trillion today—demand remains insufficient in many sectors, despite overall large-scale demand. This mismatch is contributing to slower growth.
Another major issue is overcapacity and business difficulties. Excessive investment has led to a surge in production capacity, while low consumption rates have left final demand weak. As a result, it's hard to find products that are actually in short supply.
In 1958, China aimed to double its steel output from 5.35 million to 10.7 million tons annually. Today, our steel production capacity exceeds 1 billion tons, with some mills producing more than the total of all European countries combined. Yet, they struggle to sell their products, leading to losses and operational difficulties. This is not just a problem in steel; it’s a broader issue across industries.
The most pressing macroeconomic challenge is the high debt-to-GDP ratio, exceeding 200%, mainly due to state-owned enterprises and local government liabilities. This level is considered a warning line, and there is a risk of systemic financial instability if not addressed.
Systemic risk refers to the possibility of a sudden market collapse, where problems in one area spread and trigger a broader crisis. Discussions online often focus on how to manage current challenges.
**What kind of policy should we adopt?**
There are two main views online. One suggests implementing a stimulus policy to boost growth, while another warns against repeating the 2009 approach, as its negative effects have yet to be fully resolved. Many argue that similar large-scale stimulus should be avoided.
Since 2009, several smaller stimulus measures have been introduced, but their effectiveness has gradually declined. For example, the 2012 stimulus had a short-lived impact, and by 2013, growth continued to slow. Some believe that the call for more stimulus is increasing, but this needs careful consideration.
Why is the effect of these policies diminishing, and why is maintaining GDP growth so important? A debate occurred before this year’s National People’s Congress regarding whether to target a 7.5% or 7% growth rate. Eventually, around 7.5% was chosen. However, the first quarter fell slightly below that, and some still worry about further declines.
Premier Li Keqiang emphasized that “stable growth†aims to protect employment, as GDP growth alone does not directly affect the public. The relationship between employment and growth is not linear. Different industries contribute differently to job creation. For instance, heavy industry has low employment elasticity, whereas the service sector typically generates more jobs.
Currently, even with a lower growth rate, employment has not worsened. I believe that as long as employment is stable, the growth rate isn’t as crucial. Stimulus policies that increase investment through loose monetary policy may offer short-term gains but come at the cost of deepening structural imbalances and increasing debt.
With broad money supply already at 200% of GDP, further increases are risky. High leverage poses a long-term threat, and the situation requires careful management.
Some argue that monetary policy is too tight, but last year’s broad money growth was 13.1%, well above the 9.5% needed to support a 7.5% growth rate plus inflation. Therefore, the most effective approach is to push for reforms while avoiding a systemic crisis.
**What should we do to prevent a systemic crisis?**
First, we must prevent risk accumulation and actively release existing risks. This means stopping unproductive investments. Resources are scarce, so they should be directed toward projects that improve efficiency and yield returns.
Second, stop bailing out zombie companies that are no longer viable. These firms are kept alive through loans and subsidies, which only delays necessary restructuring.
Third, use state-owned capital to cover hidden government liabilities, such as social security gaps. Shanghai, for example, sold assets to supplement its pension fund, a practice that could be replicated nationwide.
Fourth, allow insolvent enterprises to go bankrupt or restructure, releasing small risks instead of letting them grow into larger ones.
Fifth, revitalize underused assets like idle industrial zones. Many development zones remain empty, and these need to be repurposed to reduce risk accumulation.
Sixth, implement flexible macroeconomic policies to manage localized crises without resorting to broad stimulus.
Ultimately, reform is essential to improve efficiency and address the root causes of our challenges. Without it, we will continue to face growing instability.
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