Stay informed with free updates
Simply register on the Chinese economy myFT Digest – delivered straight to your inbox.
He writer is a professor at Cornell University, a senior fellow at Brookings, and the author of ‘The future of money‘
The mood in China is gloomy. Indicators of domestic and external sentiment — household consumption, private investment and entries of foreign capital — have been anemic. Property values Keep falling And the stock market is in turmoil, reflecting and fueling the sense that the economy is rudderless and that the government either doesn’t understand the gravity of the situation or has no plan to stop it, or both.
He Third plenary session Next week sees the Chinese Communist Party’s Central Committee meeting, a major gathering that typically sets a roadmap for economic policies in each five-year cycle. The government was expected to set out a clear policy agenda and specific reforms, as well as offer short-term stimulus to support growth. Those hopes could be dashed.
Chinese Premier Li Qiang I spoke recently The president talked about how to address the symptoms and root causes of the current problems, but did not offer many remedies. The plenum will undoubtedly issue routine statements about further reforms and opening up, which will fall flat if the government fails to revive market-oriented reforms.
The government is resisting the clamor for monetary and fiscal stimulus for fear of creating financial risks and increasing its debt burden. To boost the economy after the pandemic, Beijing issued a sizable amount of long-term government bonds to finance infrastructure and other spending. The central bank has moderately eased monetary policy, but credit growth remains weak. Private companies are not eager to invest in an uncertain environment.
The government has also stimulated production in certain industries, something that a command economy is generally good at. The support has boosted sectors such as green energy and electric vehicles, which fits with the goal of technological upgrading of the manufacturing industry.
Getting households to consume more, when their confidence is at rock bottom and they see their homes and stock market investments losing value, It has proven to be a more difficult propositionThe focus on large-scale, capital-intensive manufacturing has limited employment growthwhich further limits consumption. As consumption lags behind the increase in production capacity, deflationary pressures are proving to be persistent. As China tries to Export is the solution to your problems, Trade tensions with other countries are increasing, increasing pessimism.
Government ambivalence towards the private sector and its open hostility towards successful entrepreneurs have also damaged confidence. Entrepreneurs are willing to take risks in exchange for the prospect of high rewards. That calculation is upset if returns are capped, which reduces private sector dynamism and stifles innovation.
The banking system appears sound, but it is not channelling resources to the most productive sectors of the economy. Banks have little incentive to lend to small and medium-sized enterprises, including those in the service sector. Improving incentives, along with broader capital market development, is a key priority.
Local governments are under financial pressure. They account for a large share of total spending, while the central government collects the majority of tax revenues. This model, already broken, has become unsustainable as falling property values reduce local government revenues from land sales. Meanwhile, the central government has increased local responsibilities, including managing the consequences of property developer failures.
China’s current problems are both cyclical and structural, and action is needed on multiple fronts. Stimulus is not a panacea, but it can be an important part of the solution. The transition away from traditional drivers of growth, such as property investment, will take time, and the economy needs support during that process.
Targeted fiscal support for the poorest households and measures to strengthen the social safety net would be a good start. However, a stimulus without a plan for broader fiscal and financial reforms, as well as measures to rebuild the confidence of private companies, will not help much.
The Chinese government appears to have a clear set of economic goals, including rebalancing the economy toward services and higher manufacturing productivity, moving away from the property sector as a key driver of growth, and stimulating household consumption. It now needs to articulate a concrete plan to achieve those goals, provide a down payment with some specific reform measures, and lubricate the process with well-targeted stimulus. Only then will national sentiment improve.