Expanding China’s Aggregate Demand

Inefficiency and structural distortions in the economy can be considered as chronic diseases，and reform aims to address these chronic issues through exploratory measures. The treatment process can be difficult，with significant uncertainties in outcomes. A successful reform often requires a combination of factors，such as timing，ideas，and the external environment. And historically there have been few successful cases. Insufficient aggregate demand is like a fever; a severe fever can lead to a Great Depression，while a persistent fever can result in prolonged economic downturn wit lingering consequences. The cause of the fever is not inefficiency，and reform policies cannot solve it. Countercyclical policies can effectively address the fever issue，with treatment not difficult and results more certain. Currently，there are many concerns about countercyclical policies in our country，which include misunderstandings and aftereffects caused by improper selection of countercyclical policy tools. Reforms to treat chronic diseases and countercyclical policies to address fever are not contradictory; treating chronic diseases can wait，but treating fever must be timely; otherwise，persistent fever will aggravate symptoms of chronic diseases or bring new complications.Insufficient Demand Can Cause Fatal Damage to the Economy

Economic difficulties do not always stem from inefficiency and structural problems，and reform is not a panacea. The purpose of reform is to improve efficiency. However，the reasons for economic downturns are not always due to inefficiency. The main cause of the global economic depression in the 1920s was insufficient demand，not inefficiency; the primary reason for the economic downturn after the 2008 financial crisis was insufficient demand，not inefficiency; and the main contradiction in the lost two decades of the Japanese economy was caused by insufficient demand，not inefficiency. Compared to the damage caused by difficulties in improving efficiency (supply-side improvement)，the harm caused by insufficient demand cannot be underestimated. Severe insufficient demand can inflict fatal damage to a market economy. Reform is not a panacea for economic problems，and the solution to insufficient demand is not reform.

For economies that have not yet fully industrialized，the main contradictions often lie in inefficiency and insufficient supply，with inflation being a daily concern. For economies that have undergone full industrialization and significant productivity improvements，economic contradictions more frequently manifest themselves as spontaneous market demand shortages，and deflationary concerns become more common. Insufficient market demand not only results in economic downturns，difficulties in achieving full employment，and loss of resource allocation，but also exacerbates income distribution，especially for the low-income class，whose working hours and income are more sensitive to economic prosperity. Periods of insufficient demand and economic downturns often coincide with worsening income distribution and intensifying social conflicts. The Great Depression of the 1920s brought not only economic losses but also severe social unrest. In some cases，insufficient demand may be short-term，while in others，it may persist for extended periods，resulting in long-term consequences.

Severe insufficient demand threatens economic and social stability，leading to the emergence of macroeconomics. Macroeconomics based on aggregate demand management does not mention too much about reforms. John Maynard Keynes，the founder of macroeconomics，believed that insufficient demand was mainly due to investors' pessimistic expectations of the future，and that a decline in investment would further exacerbate insufficient demand through the multiplier effect，resulting in underutilization of resources and rising unemployment. Subsequent decades of macroeconomic research have found that insufficient demand may result from market failures in labor，goods，credit，and financial markets，particularly due to price stickiness. If prices remain sticky，the demand cannot be stimulated，causing the economy to stagnate at a lower level of output with resources not being fully utilized. After the financial crisis，research on insufficient demand has deepened，with a particular emphasis on the financial sector. If liquidity and asset transactions in the financial market experience significant problems，credit expansion will be hampered，leading to substantial declines in investment and severe shortfalls in demand.

As China's development stage has changed，the characteristics of the macroeconomic cycle have shifted from "easy to heat，difficult to cool" before 2012 to "easy to cool，difficult to heat" after 2012. Inflation reflects the balance of market supply and demand forces. Over the past decade，China's inflation rate has fallen significantly compared to the first decade of the 21st century，with relatively subdued economic prosperity and labor market，and spontaneous domestic demand shortages occurring more frequently. The current stage of insufficient demand in China is due to factors discussed in literature，as well as characteristics of its development stage.

Insufficient demand and sluggish credit are twin brothers，with the direct cause of insufficient demand often being weak market credit，which makes it difficult to support purchasing power growth. During periods of high economic growth，capital-intensive industries grow rapidly，investment accelerates，demand for credit is strong，and credit grows rapidly. During periods of high growth，spontaneous corporate credit growth in China accounted for more than 70% of total social credit growth，serving as the primary driving force. As the economy undergoes structural transformation，capital intensive enterprises with significant financing needs transition from investment peaks to mature operational stages，leading to a sharp decline in credit demand. Industries with greater development potential that are human capital-intensive rather than capital intensive also experience a significant decline in credit demand，with credit growth from enterprises (excluding government platforms) accounting for less than 30% of total social credit growth. Relying solely on spontaneous enterprise credit growth is far from sufficient to support adequate total social credit growth and purchasing power growth. Even with the sharp rise in household mortgage lending，overall social credit growth still fails to support a desirable level of aggregate demand.

Other economies at similar stages of development to China have had similar experiences. During the 1970-1980 period，after the end of high economic growth，Germany，France，Italy in Europe，and Japan in East Asia all experienced declines in the proportion of new credit to the non-government sector. Non-government credit includes credit to non-financial enterprises and to the households，with the decline in the proportion of new credit to non-financial enterprises being particularly prominent，corresponding to the significant slowdown in private sector investment growth. The end of high-speed economic growth also signaled the end of high capital returns，and the continued decline in capital returns caused a significant slowdown in credit expansion in the corporate sector，leading to more frequent spontaneous shortfalls in aggregate demand. Investment financed by government debt has become an increasingly important driver of overall social credit growth and demand growth.

Insufficient demand corresponds to depressed prices，inadequate employment，challenging sales revenue，and sluggish growth in operating profits. If the situation of insufficient demand persists without reversal，the pessimistic expectations of revenues and profits for enterprises，particularly private ones，continue to accumulate. This not only leads to numerous bankruptcies，but also makes survival increasingly difficult for the remaining businesses. In recent years，China's entrepreneurs have been steadily weakening，due to not only the inadequate protection of private enterprises' property rights and inadequate regulatory policies but also to the persistently weak aggregate demand. Consider a thought experiment: during the 2020-2022 period，China's core CPI was 0.8%，0.8%，and 0.9%，respectively. If stronger demand support could increase the core CPI by one percentage point，based on the relationship between nominal GDP and core CPI over the past decade，nominal GDP growth would exceed three percentage points，significantly improving the balance sheets in various sectors. Entrepreneurs' confidence depends not only on property rights protection and regulatory policies，but also on the overall environment of aggregate demand. Under the guarantee of sufficient aggregate demand，businesses' sales revenue and profits improve significantly，providing tangible support for entrepreneurs' investment confidence.

Loose monetary policy does not necessarily lead to housing bubbles and high