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The economic performance of China is of utmost importance to both Beijing and the global community. As growth slows, the impact within the country is becoming increasingly significant. With the spread of labor unrest, rising youth unemployment, and declining property prices, families are feeling the effects of a weakened economy. Last month, China officially entered deflation territory, with consumer prices dropping by 0.3%. Concerns are growing that this downward spiral will trap the economy.
The implications of China’s faltering growth are not limited to its borders, as many countries are still struggling with the aftermath of the pandemic. The IMF predicted a 5.2% growth rate for China this year, contributing 35% to global growth. However, major investment banks have recently revised down their GDP growth forecasts for 2023. The weight of significant challenges such as local government debts, an aging population, and regulatory restrictions on the private sector is increasingly burdensome. Additionally, strained economic relations with the US pose further international obstacles, exemplified by new investment restrictions on Chinese technology.
In light of these concerning indicators, China should pursue a more daring approach to reform and stimulus instead of simply tinkering with existing measures. The politburo meeting in July called for “countercyclical measures,” but their implementation has been more talk than action. Beijing must address the two biggest obstacles facing the country: the fear of looming defaults by local governments burdened by $9.3 trillion in debt and a psychological barrier inhibiting household spending.
Gavekal Dragonomics, a research company, suggests that Beijing should support the restructuring of vast amounts of local government debt by state-owned financial institutions. This measure would extend maturities and lower interest rates, aided by deflationary pressures in China. However, such support should come with conditions. Local governments should be required to disclose accurate balance sheets of their investment portfolios, including failed projects. Clear accounting is essential to proceed with the next phase of financial rehabilitation: the sale of non-performing assets to state and private companies, albeit with appropriate reductions.
Implementing these measures may face resistance from Beijing, as the party-state led by Xi Jinping is reluctant to let entrepreneurs access state assets, despite their rhetorical support for private business. However, if this opposition cannot be moderated, China will struggle to overcome one of its most challenging economic problems.
The other crucial focus should be addressing the psychological malaise prevalent among Chinese households. Major cities such as Beijing, Shenzhen, and Guangzhou have expressed plans to stabilize the property market through unspecified measures. To start, reducing mortgage interest rates, downpayment ratios, and other restrictions would be beneficial. Halting property price declines would assure households that their main source of wealth is not diminishing, potentially rejuvenating consumer confidence and sparking a positive cycle. Failure to take substantial measures to boost the economy could further erode confidence and hasten the onset of deflationary shock.
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