Who believes in China’s output gap?

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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, th…