the author is”the future of money‘

China’s economy fared very well in pandemic, but now faces Slowing growth and financial market volatility. This reflects some of the dilemmas Beijing is grappling with, some of its own making.

The Chinese government appears willing to tolerate lower short-term growth to ensure long-term growth Prosperity. This approach is well-intentioned, but the specific policies adopted could create more uncertainty and volatility, thereby eroding public support for the reforms needed to boost long-term productivity and growth.

However, there is a way to improve this trade-off: take strong steps to better define the role of government in the economy and financial markets.

The real estate industry outlines the challenges facing Beijing. Some property developers, such as Evergrande, are desperate for debt-financed developments, while many households borrow money to buy multiple properties for speculative purposes. The real estate industry is emblematic of many excesses in the Chinese economy, and the government clearly has no choice but to rein in it to prevent growing economic and financial imbalances.

Attempts to simultaneously reduce debt accumulation in the economy and curb property speculation have sent the housing market into a downward spiral. The government is now finding that correcting imbalances in an industry that has long relied on to support growth, boost local government revenue and boost household wealth will come at a huge cost. The real estate industry’s impact on nearly every facet of the economy, financial markets and society makes it a thorny issue.

Beijing has developed two frameworks to guide its policymaking. Firstly, “double loop“, means continuing to engage in global trade and finance, but seeking to rely more on domestic demand as well as technological self-sufficiency and local innovation. This”common prosperity“The agenda aims to distribute the fruits of growth more equitably. These are laudable frameworks, but encounter some difficult realities.

The government wants to stick to its deleveraging campaign and has rightly limited the use of debt-financed investment to support growth, fueled by easy monetary policy. Likewise, it wants to reduce energy-intensive production and the economy’s reliance on heavy industry and low-wage manufacturing. But the banking system continues to direct financing to large state-owned industrial firms, making it harder for smaller, more nimble private firms, including service-sector firms, to access credit.

Beijing’s Willing to let Evergrande default Showing its readiness to encourage market discipline by eliminating the implicit state guarantees backing financial firms and large corporations. However, the accompanying desire for increased state control over the economy and financial system, including measures by central banks to direct credit through statutory rather than market mechanisms, has added more confusion than clarity.

Xi Jinping’s government is clearly at odds with the role of the private sector.Rely on it to innovate Beijing moves to curb businesses, especially in technology, is seen as having undue economic and political influence. Nor is it easy to compare the goal of curbing wealth inequality with the goal of relying on the private sector to create more wealth.

Balancing these conflicting goals is not impossible, but requires a different approach. First, the government must commit to reducing its influence in financial markets. Second, it must address legacy issues that have hindered restructuring, such as the high levels of hidden bad debts in the banking system. Third, broader reforms are needed to redirect the economy in the direction Beijing wants. This includes more decisive reforms of state-owned enterprises and measures to strengthen the social safety net. These steps must be complemented by institutional reforms to improve the legal framework, including better protection of intellectual property rights and corporate governance and transparency.

These measures will help improve the trade-off between short-term pain and better long-term economic outcomes. Beijing may still have to accept lower growth as the price of trying to have it all, but if that growth were more stable and balanced, it would be more palatable for China and the world economy.