I recently wrote a piece at my job, and somewhat unusually for us, it’s come out from behind the paywall so that everyone can read it. Here’s the opening:

There are two statements about China’s economy that receive broad agreement today. One is that China faces a long-term structural slowdown in its growth rate, due to a laundry list of factors including the law of large numbers, changing demographics and less catch-up potential as an upper-middle-income country. The other is that China’s economy has recently been underperforming, suffering from extended deflation and weak employment, and would benefit from more aggressive cyclical stimulus. It’s not contradictory to believe both of these things, but there is some tension between them.  

The way people resolve that tension is, at least implicitly, by taking a view on the output gap–the difference between actual economic growth and its underlying potential. If you believe more strongly in the structural slowdown story, then you think the output gap is unlikely to be large, as the economy’s potential growth is steadily declining. If you believe more strongly in the current underperformance, then you think the output gap is large, and needs to be addressed. What’s curious is that while China’s government professes to believe that the potential growth rate of the economy is high (thanks to all of its wise industrial policies), it doesn’t act that way.

Whatever their expressed views might be, China’s policymakers are not acting as if they believe there is currently a big output gap. While fiscal stimulus has stepped up in 2025, the support from monetary- and property-policy measures has been less than expected. Official rhetoric is increasingly treating deflation not as a sign of deficient aggregate demand, but as a structural problem best dealt with through regulatory changes and industrial policy. Such interventions have stepped up since the July meeting of the Central Commission on Financial and Economic Affairs, chaired by top leader Xi Jinping, said the government would “regulate and manage disorderly low-price competition among enterprises in accordance with laws and regulations.”

Despite some public differences, it seems that both Chinese government officials and the staff of multilateral institutions hold fundamentally similar views: they believe more strongly in the structural slowdown of the Chinese economy than in the contemporary evidence of a large output gap. Financial-market participants, by contrast, tend to hold more strongly to the view that more aggressive stimulus is necessary.

I’m with the markets here: I believe in the output gap. The structural slowdown of the Chinese economy is an incredibly consensus view, and I believe in it too. But for a variety of reasons I think it makes more sense to stay agnostic about forecasts of potential GDP growth, and focus more on the signals the current performance of the economy is sending.

You can read the whole thing here.