First published: 28th October 2024
(This is slightly longer and different from the version published in The Spectator, 27th September 2024, see separate listing)
China’s leadership and economic policymakers, ever optimistic and confident about the economy, are now clearly spooked.
Two weeks ago, state media reported that the Chinese economy was posting ‘stable economic growth’ as the country continued to ‘advance high-quality development’. In the last week, the government has announced and is expected to approve over 3 trillion yuan ($426 billion, £319 billion) of measures, or about 2.3 per cent of GDP, to support what is in reality a weak economy, featuring an array of systemic economic and social problems. China’s hitherto moribund stock markets have erupted, posting 12-15 per cent gains in the biggest weekly move for 15 years. The question though is whether the government will succeed in fighting off deflation and restoring economic confidence?
While the authorities have been taking mostly ineffective steps to support the real estate market and sustain economic momentum for a long time, it is worth noting the lengths to which the government now seems to be going.
Early last week, the authorities announced the biggest monetary policy stimulus since Covid, comprising interest rate and mortgage rate cuts, reductions in the downpayment for second homes, additional help for state enterprises to buy unsold homes, and 800 billion yuan ($113 billion, £85 billion) of liquidity facilities to allow non-bank financial firms to buy equities and listed firms to buy back there own shares. A 1 trillion yuan ($142 billion, £106 billion) bank re-capitalisation program is also considered likely.
These measures were rocket fuel for stock markets, favouring not least the state enterprises and institutions that constitute much of the ownership of shares. Yet, while the measures generally may bring temporary relief, they will not really boost the economy much. China’s economic problems are not due to interest rates being too high, a shortage of liquidity, or credit supply constraints and China’s property market needs much more than patchy support designed to stop it from adjusting to decades of overbuilding and a bursting bubble.
The Politburo meeting last week, though, was interesting because it never considers economic issues at its September forum. Yet, this time, it addressed macroeconomic issues, saying that it was necessary to ‘intensify counter-cyclical adjustments’, and ‘maintain necessary fiscal expenditures’. As reported here, the government is expected to announce during or soon after the Golden Week holiday in the first week of October, a 2 trillion yuan ($284 billion, £212 billion) borrowing programme, split roughly equally between measures to support consumption, and help to alleviate local government indebtedness problems.
The latter amounts to a shift in a limited amount of debt ownership from local to central government, which Beijing has previously railed against, but which is more financial engineering than economic stimulus. The consumption part, however, could have a more meaningful impact. Some is about extending the hitherto sparsely used new-for-old trade-in support for consumer durables and business equipment upgrades. At best this borrows future consumption. The reported introduction of a monthly 800 yuan ( $113, £85) child benefit payment for all but first children, equivalent to about 30 per cent of median post tax monthly income, could certainly give household consumption a shot in the arm.
It will be important to assess the details when published to see if the policy is temporary or permanent, what the eligibility criteria will be, and ultimately, how much might end up being consumed, and how much saved. Yet, it could add to economic growth in 2025, to compensate at least partly for the ubiquitous drags that are pulling it down.
The government’s 5 per cent target for 2024 economic growth may now be salvageable, or at least come close. Nevertheless, while the current stimulus measures will help to stabilise and even push up economic activity, the underlying trend in China’s economy points towards persistent slowing down. Next year, for example, it may be up to 1 per centre point lower than in 2024, and over the medium-term not much more than 3 per cent, if that.
It is worth bearing in mind that Xi Jinping’s focus on cyclical support for the economy is necessary but by no means sufficient or even relevant to address the country’s systemic flaws. The engines of past economic growth, property, infrastructure and the expansion of the finance sector are all spent forces now, and must adjust to more modest conditions and weaker fundamentals. Ridding China of deflationary, deleveraging, and unemployment risks will require a major re-think, which may be politically impossible for a Leninist government, about demand management, distribution, inequality, access to social welfare, and the provision of public goods and services to more people, including almost 300 million migrant workers.
Instead, Xi Jinping’s economic strategy is focused on state-led industrial policy in which the private sector plays a political second fiddle, a mercantilist preoccupation with exports which sits uncomfortably with a rising chorus of nations, and fighting macroeconomic fires instead of re-engineering China’s economic model. A spooked government need look no further than its leader.
