China's questions for economists and the green revolution

What happens in the world's second largest economy has a global impact in both the short term and the long term. As the focus on the short term prevails, everyone is now looking at the difficulties the Chinese economy is going through in the face of the danger of deflation and a slowdown in growth below this year's target of 5%. A target below the trend of the past decade, but still above that of the major advanced economies.

The debate among economists, also in China, focuses on two main questions. The first is whether or not the Chinese authorities should have adopted a more markedly expansionary economic policy to support domestic demand and avoid a deflationary spiral. The second, which has implications not only in the short term, concerns the extent to which the fundamental objective should have been to increase the weight of consumption and reduce that of investment as drivers of growth, hence also as components of demand.

The answer to the first question came with the monetary expansion measures taken by the Chinese Central Bank: lower bank interest rates and liquidity support for banks, lower rates on housing loans, and other measures to support home purchases. Hard-hitting measures of fiscal stimulus, more effective than monetary stimulus, are announced at a time when monetary expansion may come up against low demand for credit due to the degree of uncertainty among consumers and investors.

Many commentators have evoked the expansionary stimulus (of around $580bn) adopted by the Chinese government to counter the effects of the 2008 financial crisis. The positive impact of the measures adopted and announced on the declining Shanghai and Hong Kong stock markets was immediate and it will be seen how it will last and whether it will be transmitted to the other financial markets. That is, we are waiting to see the short-term effect on the real economy, which derives not only, and perhaps not so much, from the resources injected into the economy, but much from the injection of confidence that may result on households and businesses.

This moves us to the second question posed. In a country with a national savings rate close to 45%, it is clear that there is ample room for increased consumption, even if it is easier to support investment through public action than to change consumer behaviour. But the issue of the balance between consumption and investment requires a shift to medium- to long-term considerations. China is in the midst of a major transition: from growth driven by investment in infrastructure and construction, linked to the urbanisation and industrialisation process, to growth driven by investment in new high-tech sectors and driven by energy transition objectives. In other words, it is a matter of not letting even important sectors of the economy collapse, but of gradualising their reduction in weight, while investing heavily in the economy of tomorrow.