Professor Zhang emphasised that the crisis China faces isn’t solely a matter of macroeconomics. He explained: “It’s always been kind of a combination of the macro issue and also the structural issue.” The interplay between these factors has led to a careful approach by Chinese authorities in implementing policies, he said in an interview with Emmanuel Daniel, founder of The Asian Banker.

A glaring theme in China is the skewed allocation of resources between the private and state sectors. The dominance of state enterprises in resource allocation, particularly in financial resources and credit, has long handicapped the private sector’s access to essential capital. Zhang emphasised the need to incentivise the private sector, both the smaller businesses grappling with credit accessibility and the technology conglomerates sourcing capital internationally.

His solution is clear: a more conducive policy environment that empowers private enterprises. By addressing these resource disparities, China could pave the way for a more balanced allocation of resources, supporting growth in both sectors.

Unlike conventional economic downturns, the pandemic-triggered recession impacted both supply and demand, necessitating a nuanced approach to recovery. Zhang suggested that three years of uncertainty caused by the pandemic have indelibly altered spending patterns, investment decisions, and overall economic behaviour, and rebuilding confidence takes on added importance as it shapes the course of China’s recovery.

Exchange rates and inflation have been a topic of significant debate, especially when considering the Renminbi’s role in maintaining competitiveness and price stability. Zhang emphasised that over the long term, China’s economic growth would naturally drive a stronger Renminbi. However, the government also employs policies to ensure a degree of stability in the currency’s fluctuations. The challenge lies in reconciling conflicting foreign-exchange interests—stronger for exporters but competitive for importers.

Inflation tells a different story in China. Zhang posited that China’s economy, historically surplus-driven, faces overcapacity, making significant inflation unlikely.  

Today, China is facing a high percentage of unemployment that, according to Zhang, is slowing not just the country’s economy, but also markets around the world. He stressed: “The biggest challenge in any economy today is the change in the labour market.”

He underscored the necessity of a comprehensive approach to policymaking. Addressing resource imbalances, restoring confidence, and navigating unique inflation dynamics all demand equal attention. His insights carry invaluable lessons for economists and policymakers grappling with the multifaceted nature of China’s economic landscape.

The intricate play between investor expectations, social dynamics, and economic fundamentals will chart China’s trajectory in the years ahead.