The future of China's economy hinges on industrial policy and private enterprise: Huang Yiping

Our briefing on critical developments in China's economic discourse as of 2 May, 2025.

In this briefing:

• China's use of macroeconomic policy to prop up growth is unsustainable, according to Huang Yiping (黄益平), head of Peking University's National School of Development. He believes China's economic future depends upon the greater use of industrial policy and reforms to support private enterprise.

• Consumer loans are now a "disaster zone" for bad debt, according to Xue Hongyan (薛洪言), deputy-head of the Xingtu Financial Research Institute. Non-performing loan ratios in the Chinese bank sector have continued to decline, however, on the back of improving corporate loan quality.

• China's Politburo wants to drive growth in domestic demand with monetary policy that supports services consumption. Shen Jianguang (沈建光), chief economist at JD.com subsidiary JD Technology, says China's levels of services consumption remain low compared to other major economies. At its 25 April meeting, the Politburo announced plans to use services consumption reloans as a new monetary policy tool for boosting domestic demand.

• Trump's tariffs could drive double-digit growth in China's fiscal spending in the second quarter, according to Zhang Yu (张瑜), a researcher from Renmin University's International Monetary Research Institute. She says the structure of fiscal spending and government debt issuance points to an increased focus on consumption, as opposed to infrastructure investment. This could change in the second quarter, however, if China steps up spending on government investment projects to soften the blow of Trump's tariffs.

China's macroeconomic policy is unsustainable - future growth depends on industrial policy and private enterprise: Huang Yiping

Huang Yiping (黄益平), head of Peking University's National School of Development, says a more holistic combination of macroeconomic policy with industrial policy and private enterprise reforms is needed to achieve sustainable growth in future.

Huang points to the secular slowdown in China's GDP growth rates over the past two decades, as the scale of its national economy has ballooned.

"Before 2012, China's GDP growth targets were set at 7 - 8% each year...however, actual growth rates were often above 9%, and in the majority of years exceeded 10%," Huang writes ("黄益平：当前形势下的稳增长政策思考").

After hitting a peak in 2010 however, China's economy has since been subject to "long-term downward pressure, bringing target GDP growth rates down to around 5% at present."

Beijing signalled the launch of large-scale fiscal and monetary stimulus at the end of last year, to keep the economy afloat during the very likely contingency of a trade war in Trump's second term.

Huang argues, however, that these are only stop gap measures that can't be adopted on a long term basis.

"It's obviously unsustainable to continually rely on [macroeconomic] policy loosening for a period of two to three years, let alone five to ten years," he writes.

Huang instead advocates the "mutual integration" of macroeconomic policy with industrial policy to support innovation, and reform policy to support private enterprise.

Industrial policy

"We need emerging industries to continually enter the market to support economic growth," Huang writes.

"China has faced downward economic pressure over the past dozen years...under these conditions, industrial policy appears to be especially important.

"Fundamentally, whether or not China can grow sustainably still depends on whether or not emerging industries arise to support future growth."

In addition to supporting emerging industries of the future, Huang says industrial policy should also play a role in rectifying problems such as insufficient scale and "excessive concentration of innovation."

He highlights an excessive focus on the three areas of electric vehicles, lithium batteries and photovoltaic products as a problem for China's hi-tech sector at present.

"Although they've developed strongly, their volume is inadequate, and they are not sufficient to support the next round of China's economic growth," Huang writes.

The highly concentrated nature of these sectors has also led to overseas accusations of Chinese industrial overcapacity and excessively low costs.

"This phenomenon reminds us that we need to consider how to use industrial policy to guide appropriate industrial adjustments - especially at the level of local government policy - to spur more pluralised development of innovation."

Private enterprise support

"Private enterprise has already become the main force for innovation in our economy," Huang writes.

"China's ability to create competitive pressures for the enterprises of other countries on the international market is almost without exception due to private enterprise...[they] will play an extremely important role in the next round of China's economic growth."

For this reason, Huang calls for the effective implementation of policies already announced to improve the environment for private enterprise in China, and "pragmatically raise their confidence."

Huang also highlights the need to raise the efficiency of the market allocation of resources, and "truly employ the decisive role" of the market in resource allocation.

Consumer loans emerge as disaster zone of bad debt for Chinese banks

Xue Hongyan (薛洪言), deputy-head of the Xingtu Financial Research Institute, says China's push for growth in domestic consumption has had the unfortunate side effect of creating a rash of non-performing consumer loans.

"Recently, the problems of commercial banks transferring their non-performing loans all at once has drawn widespread attention," Xue writes ("薛洪言：银行不良贷款的困局与突围").

"Personal consumer loans in particular have become a disaster zone for the disposal of non-performing assets."

While the overall rate of non-performing loans (NPL) in China's banking sector has held steady, Xue points to sharp structural changes that are "hard to ignore."

As of the end of 2024, the total assets of Chinese commercial banks stood at over 370 trillion yuan, for a rise of 7.2% compared to the same period the year previously.

The sector-wide NPL ratio stood at around 1.5%, maintaining a downward trend for the 17th consecutive quarter.

Xue argues that while China's financial system has seen "further consolidation of its stable foundations,” structural shifts point to new sources of risk.

"Overall, the loan assets of the banking sector have seen a divergence, with corporate loans holding steady and retail loans becoming risky," Xue writes.

"The quality of retail loans has continually worsened."

Taking China Merchants Bank as an example, Xue notes that it racked up 66.704 billion yuan in new NPLs in 2024, of which 39.375 billion - or 59% - consisted of credit card debt.

By contrast, in 2024 the NPL ratio of corporate loans made by China's main commercial lenders extended their downward trend, driven largely by a 10 basis point drop in the NPL ratio of corporate real estate lending.

The emergence of retail loans as an acute risk area for the Chinese banking sector arrives following a push from Beijing to step up financial support for domestic consumption.

"In terms of the cause, many banks are capitalising upon the Internet to grow consumer lending, leading to a continuous decline in the quality of customers," Xue writes.

"Amidst downward economic pressure, the income dependability of borrowers has declined, which in tandem with a rise in public debt risk and marked weakening of repayment capability, has become a core reason for the surge in the non-performing ratio of retail loans."

Xue says some "short-term pain is unavoidable," with banks forced to step up their disposal of these dud loans, primarily via "traditional methods" such as write-offs and securitisation.

China can boost domestic demand by lifting up low services consumption: Shen Jianguang

Shen Jianguang (沈建光), chief economist at JD.com subsidiary JD Technology, highlights an upcoming focus on services consumption as part of broader efforts by Beijing to boost Chinese domestic demand.

On 25 April, the Communist Party's Politburo held its first major meeting since the launch of Trump's Liberation Day tariffs.

The meeting served primarily to reiterate Beijing's commitment to pre-existing fiscal and monetary policy measures for tiding over the economic uncertainty created by Trump's second term in office.

However, it also called for the use of new measures to boost Chinese services consumption.