“Our money is running out” is the constant refrain I have heard from mainland Chinese since late 2022, when China suddenly lifted zero-Covid restrictions that had hit the economy hard.
More than a million restaurants are reported to have closed nationwide in the first half of this year, nearly the total of all of last year, as consumers cut back on spending. Retail sales rose just 2.1 percent year over year in August despite the summer travel spike, down from a 2.7 percent increase in July.
Pessimism among companies is widespread. Industrial production grew 4.5 percent in August, slowing from 5.1 percent in July, while industrial profits suffered the biggest drop this year, plunging 17.8 percent.
Local governments, which rely heavily on the sale of declining land for revenue, have now resorted to arbitrary fines on companies. National non-tax revenue increased 12 percent in the first seven months of this year.
At first glance, these episodes seem to paint a bleak picture, but that’s only half the story. According to government data, household deposits reached a record 146.3 trillion yuan ($20.8 trillion) at the end of June. That figure was larger than the market capitalization of mainland China’s stock market, which was 73 trillion yuan, and China’s gross domestic product, which was 126 trillion yuan.
The real problem is not a lack of money, but a lack of confidence to spend that money. More importantly, people have been baffled by the complete lack of clarity about the Chinese leadership’s thinking on how to move forward with the world’s second-largest economy.
Since late 2022, expectations have been rising for the country’s leaders to implement a bold stimulus program to boost the economy and prevent a slide into Japanese-style stagflation. In 2008, China’s leaders launched a “big bazooka” during the global financial crisis.
The current leadership had resisted calls for a stimulus despite obvious signs of a weakening economy. That was until late last month, when Beijing suddenly made another big policy shift and launched a series of bold measures to restore confidence. The size of the stimulus surprised many and sparked a rally in mainland China and Hong Kong stock markets, as well as China-related stocks in the United States.
Before understanding the reasons behind this sudden change in stance and its implications, it is interesting to explore why the country’s leaders took so long to act.
One of the main reasons is that they are still dealing with the aftermath of the 2008 stimulus package, in which the central government injected 4 trillion yuan into the economy. Adding investment from local governments, it is estimated that the stimulus package reached at least 30 trillion yuan. All that money quickly revived the economy, but at the same time contributed to massive industrial overcapacity, wasteful projects, and high-polluting, high-energy industries—consequences that the government is still grappling with.
Although President Xi Jinping has consolidated considerable power over the past decade, provincial leaders of the Chinese Communist Party continue to wield significant influence over local economic and investment priorities.
A monetary and fiscal stimulus similar to that of 2008 could lead to another cycle of redundant and low-quality development, with each province or municipality seeking to establish its own electric vehicle or semiconductor assembly plants.
As a result, the government has opted for relatively moderate measures to stimulate economic growth. In June, Premier Li Qiang publicly compared the Chinese economy to a patient recovering from a long illness, presumably referring to the impact of three years of strict COVID-19 policies. Following traditional Chinese medical theory, he warned that “strong medicine”—alluding to a bold stimulus—could be harmful to the patient, who should recover slowly.
However, this strategy has failed miserably. Leadership’s intention to address long-term structural problems has been overtaken by a short-term crisis of confidence permeating the economy. Disappointing economic data in August finally convinced the authorities to resort to stronger measures to create a positive impact on the population, ahead of the elaborate celebrations for the 75th anniversary of the founding of the People’s Republic of China.
What’s next? Stock market investors have sparked another frenzy, reminiscent of the 2015 bubble. The problems that prevented authorities from implementing bold stimulus much earlier still persist. That probably explains why this year’s stimulus package appears modest compared to 2008’s.
Still, there are concerns about whether economic growth will pick up enough to sustain the spectacular stock market rally. Revitalizing the private sector will be the litmus test, especially as private companies generate more than 80 percent of new jobs and contribute 60 percent of China’s GDP.
Confidence in the private sector has remained extremely low since Beijing’s broad crackdown and increased regulatory and political restrictions that began in 2019. However, since last year, officials have attempted to appeal to the private sector by expressing support for the businessmen. This support has been more rhetorical than substantive, amid frequent reports of businessmen arbitrarily detained or prohibited from leaving the country.
Taking decisive action to stabilize the real estate market and inject a large amount of liquidity into the stock markets is a much-needed stimulus, but only in the short term. China needs more concrete actions, such as relaxing regulatory and policy restrictions on private businesses and increasing social security benefits for low-income groups, so that consumers and entrepreneurs feel secure enough to spend again.
Note: this is an article published with the authorization of its author through a cooperation agreement between both parties for the dissemination of journalistic content. original link.
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