Government advisors in China are divided over the appropriate course of action due to the country’s economic slowdown, with supporters of structural reforms now coming out of the shadows to take on others who want to increase state spending to support slowing development.

The unusual disagreement among advisers, who have some influence over policymaking but no actual power, occurs as investors around the world search for signs of how the government plans to stop a downturn that has cost millions of jobs, driven away investors, and caused the value of the yuan to plummet.

A trickle of piecemeal support actions from Beijing in recent months have sparked concerns about the difficult decisions that China’s new economic leadership now must make on whether to prioritise urgent changes or short-term relief.

The federal government’s low debt implies it can share the burden with municipalities to finance infrastructure and other spending to boost activity, according to advocates for rapid stimulus. However, pro-reform advisors contend that more radical economic structural reforms are now required because the stimulus playbook, which fostered prosperity for decades, has reached the end of its useful life.

Prior to the annual Central Economic Work Conference, a high-level agenda-setting session anticipated in December, both factions contend that policymakers should treat their recommendations with urgency.

“We need stronger stimulus policies and an overall plan, a package of macroeconomic policy measures,” said Yu Yongding, an influential government economist who previously advised the central bank.

“China should issue more government bonds to finance infrastructure investment, including more investment in public facilities such as hospitals and old people’s homes. China should not be afraid of increasing its budget deficit-to-GDP ratio and government bonds-to-GDP ratio,” Yu told Reuters.

Yu said China’s central bank is limited in how much it can loosen monetary policy due to concerns that a growing interest rate differential with the US could lead to capital flight and yuan depreciation.

“We need to step up fiscal stimulus. There is room for the central government to step up spending given its sound fiscal position,” said an adviser who spoke on condition of anonymity.

The national government’s debt as a percentage of GDP is only 21%, far lower than the local governments’ debt, which includes concealed debt, which is 76%.

China intends to have a 3.0% GDP budget deficit in 2023. In order to fund infrastructure, local governments are rushing to issue the required amount of special bonds for 2023, which is 3.8 trillion yuan ($520.68 billion).

The pro-reform group is pushing for more rapid structural reforms, such as easing the “hukou” (residence permits) system to encourage consumption and lowering market entry barriers for small businesses at the expense of state monopolies.

Amid indications of greater government influence over the economy, some are pushing for the revival of stagnant market reforms.

The International Monetary Fund intends to advise China to increase domestic demand, reduce local government debt, and decongest its bloated real estate market, according to Managing Director Kristalina Georgieva, who spoke to Reuters over the weekend.

“Policy stimulus is not effective and it’s just a placebo,” said one of the advisers.

Liu Shijin, a central bank consultant, and Yi Gang, a former chairman of the central bank, both agreed that China must pursue reforms to release the spending potential of migrant workers who have entered cities.

According to him, urgent reforms are required since key growth sectors like real estate, trade, and infrastructure are stagnating.

“If we continue to focus on macroeconomic policies to stabilise growth, the side effects will increase, and more importantly, the opportunity for structural reform will be missed again,” Liu told a forum last month.

“It’s not just macroeconomic policies that have short-term effects. Structural reforms with expansionary effects can also have immediate effects.”

(Adapted from FirstPost.com)

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