Is China Lurching Towards Disaster? Why a Spending Injection Won’t Save its Economy!

Analyzing China’s Economic Recovery and Expectations for a Major Stimulus Package

China’s economic recovery, which initially showed promise, has lost steam in recent months, leaving investors disappointed and questioning the government’s commitment to economic growth. However, hopes for a significant stimulus package have recently grown. This article examines the expectations surrounding China’s economic intervention and explores the likelihood of various policy measures being implemented.

The Government’s Prioritization of Growth

Despite concerns about China’s economic performance, it is believed that the government values growth and will intervene to stabilize the economy and real estate market when necessary. Given the significant decline in economic momentum, experts argue that now is an opportune time for the government to take action.

Modest Policy Support

While the government is expected to provide policy support, it is anticipated that such measures will remain modest. Potential interventions include easing land restrictions, increasing infrastructure spending moderately, providing financial support to property developers and local governments, and implementing targeted consumer subsidies. However, those expecting a large-scale fiscal program or monetary expansion similar to previous episodes may be disappointed.

Fiscal Challenges and Debt Constraints

China’s fiscal space is limited due to its high debt levels. According to the Bank for International Settlements, total debt is projected to reach nearly 300% of the country’s gross domestic product by 2022. Public debt, including local government platforms, already exceeds 90% of GDP, mainly at the local level where cash flow struggles to cover interest payments. This high debt burden, coupled with rising pension and healthcare costs, presents significant fiscal challenges.

Weakening Housing Market

While it is crucial to stabilize housing starts and new home sales, the supply and demand dynamics indicate a weakening housing market. China has experienced substantial urban development over the past decade, with most old city centers revitalized and slum dwellings replaced. Additionally, home ownership has reached 80% in 2020, and the rural workforce has largely migrated to urban areas. Household income growth has also slowed, contributing to the dampening of housing market activity.

Uncertain Efficacy of Monetary Expansion

There is no guarantee that a significant monetary expansion would effectively address the current economic challenges. Low business and household confidence, coupled with high debt levels, may limit the impact of monetary measures. Instead of stimulating private sector credit demand, monetary expansion could potentially reinforce unsustainable growth patterns driven by local government spending. The Chinese government is also concerned about financial stability and inflationary risks.

Structural Issues and Transitioning Growth Patterns

Policymakers in Beijing acknowledge that the current economic woes are not merely cyclical but also deeply rooted in structural issues. They understand that significant stimuli cannot solve these underlying problems. China is gradually moving away from a growth model led by real estate and local government activities. This transition is challenging and entails a reluctance to spend massively on the struggling sectors. Consumers lack confidence in retirement and healthcare coverage, influencing cautious spending. Moreover, investor confidence in the private sector is hampered by uneven competitive conditions with state-owned companies and concerns regarding tighter regulation.

The Impact of Technological Restrictions and Global Supply Chain Adjustments

Chinese companies are grappling with reduced access to advanced technologies due to decoupling from the United States and its allies. This restricted access affects the inward flow of exports and foreign direct investment. Furthermore, global supply chain adjustments have also impacted China’s export-oriented industries. These factors further contribute to the economic downturn and necessitate swift action, particularly in the struggling real estate sector.

Proposed Recovery Plan

Instead of opting for a large-scale fiscal stimulus, it is suggested that China should implement a moderate recovery plan accompanied by concrete structural policies. These policies could focus on reducing barriers to entry and enhancing legal protection for the private sector, increasing health and social protection spending, and deepening household registration reforms to enhance labor mobility and purchasing power for rural migrants. While major reforms for state-owned enterprises may be unlikely, efficiency improvements and measures to curb monopolistic behavior are feasible.

An Engaging Additional Piece: Embracing Change for Long-Term Growth

As China navigates its economic challenges, it is vital to acknowledge the necessity of embracing change for long-term growth. While expectations for a major fiscal stimulus package may be unmet, this should not hinder China’s economic prospects in the long run. A diminished role for the government in driving growth can foster more pronounced business cycles, but it can also facilitate the removal of inefficient market players and create room for the private sector’s development. This realignment of the state and the market’s roles presents an opportunity to allocate more resources to social spending.

China’s economic transition from real estate and local government-led growth is undoubtedly a painful process. However, it is necessary to address structural issues and foster sustainable development. Confidence in retirement and healthcare coverage needs to be restored to encourage consumer spending, while efforts should be made to level the competitive playing field between state-owned enterprises and private companies.

Furthermore, amidst technological restrictions and global supply chain adjustments, China must find alternative avenues for growth. Focusing on innovation and R&D investment can help reduce dependence on advanced technologies from abroad. By nurturing domestic talent and fostering a supportive ecosystem, China can drive indigenous technological advances and secure its position as a global leader in various industries.

Additionally, China should proactively engage with its international partners to seek mutually beneficial solutions. By promoting fair trade practices and participating in initiatives for global cooperation, China can demonstrate its commitment to open markets and facilitate a more stable and prosperous global economic environment.

In conclusion, while China’s economic recovery faces challenges, an effective response is possible through a combination of moderate recovery measures and concrete structural policies. By acknowledging the limitations of traditional fiscal stimuli and embracing necessary changes, China can pave the way for sustainable and inclusive growth.

The writer is Chief China Economist and Head of Asian Economics at UBS Investment Research, and author of “Making Sense of China’s Economy.”

After a promising start, China’s economic recovery has run out of steam over the past two months. Investors were disappointed by the lack of policy responses, with some wondering if the Chinese government still cares about economic growth. Over the past week, hopes for a major stimulus package have grown. What should we expect?

I believe that the government cares about growth and will intervene to stabilize the economy and the real estate market if necessary. Given the recent sharp deterioration in economic momentum, now is the time to act.

However, policy support is expected to remain modest and could include an easing of land restrictions, a moderate increase in infrastructure spending, financial support for property developers and local governments, and targeted consumer subsidies. Those who expect a large fiscal program similar to that of 2008 or even 2015, a massive bailout of local government debt, major monetary expansion or measures to reinflate the housing market risk being deeply disappointed.

First, China has less fiscal space. Total debt will reach almost 300% of gross domestic product in 2022, according to the Bank for International Settlements. We estimate that public debt, including that of local government platforms, exceeds 90% of GDP, most of it at the local level where cash flows are generally insufficient to cover interest payments.

China’s high domestic savings and state-owned banking system limit the risk of a liquidity-related debt crisis, so in theory the central government could borrow more to fund a generous fiscal stimulus. However, the country faces huge fiscal challenges, including rising pension and healthcare costs to support its rapidly aging population.

Second, while housing starts and new home sales have fallen excessively and need to be stabilized, shifts in supply and demand point to a weakening housing market. Over 127 million urban housing units have been built since 2008. Most old city centers have been upgraded and slum dwellings have been replaced. Meanwhile, home ownership has reached 80% in 2020. China’s population is declining and most of the rural workforce has already moved to work in the cities. Household income growth has also weakened.

Third, there is no guarantee that a significant monetary expansion would work given low business and household confidence and high debt levels in both sectors. With weak demand for private sector credit, monetary expansion could end up simply supporting local government spending, thus perpetuating an unsustainable growth pattern. The Chinese government may also be concerned about the risk to financial stability and the inflationary consequences.

More importantly, I think policymakers in Beijing understand that these economic troubles are not just cyclical. Big stimuli can’t solve deep-rooted structural problems. Willingly or not, China is moving away from real estate and local government-led growth, which is a painful process. Consumers lack confidence in future retirement and healthcare coverage and continue to spend cautiously. Low investor confidence in the private sector is not only due to the weak economy, but also to uneven competitive conditions with state-owned companies (SOEs) and concerns about tighter regulation.

To make matters worse, Chinese companies are struggling with reduced access to advanced technologies and decoupling from the United States and its allies. China’s inward exports and foreign direct investment are also feeling the effects of global supply chain adjustments.

Swift action is now needed to combat the sharp downturn, especially in the struggling real estate sector. But instead of spending massively, China should opt for a moderate recovery plan (1 to 2% of GDP), accompanied by concrete structural policies.

These could include reducing barriers to entry and improving legal protection for the private sector; a widely publicized increase in health and social protection spending; and deepening hukou (household registration) reforms to increase labor mobility and purchasing power of rural migrants. Although major reforms of state enterprises are unlikely, steps could be taken to increase their efficiency and limit their monopoly.

While China may disappoint a market hoping for a big fiscal stimulus, that shouldn’t hurt its economy in the long run. A lesser role for government in driving growth can lead to more pronounced business cycles, but could also help weed out inefficient market players, provide more space for private sector development, and increase resources for businesses. social spending. Such a realignment of the roles of the state and the market would be welcome.