Abstract: “Balance sheet recession” is more a description of a macro phenomenon than a complete theory. Simply applying the concept is problematic, as China’s economic data do not meet many of the important characteristics. Overemphasizing “balance sheet recession” may mislead economic conclusions and policy choices. There could be a simpler and more traditional interpretation of China’s macroeconomy, which is based on three features: first, the neutral interest rate has been low. Second, the demand side was hit by large shocks in 2021 and 2022. Third, a more restrained macroeconomic policy has been adopted. The combined result of these three factors is a lack of demand, lower incomes, inflation, interest rates, and a lack of endogenous growth momentum through the traditional Keynesian economic mechanism. Therefore, we should be vigilant about three main risks, namely, the liquidity trap, debt deflation, and the paradox of deleveraging. The key to addressing these risks is achieving moderate inflation, which can also be set as the objective of policy options.
