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China has taken a series of incremental steps to boost its economy after a series of disappointing data showed the government is increasingly at risk of missing its growth target of around 5% for this year. But Beijing is not putting together a “bazooka” stimulus package like it did during the 2008-09 global financial crisis or even when the 2020 pandemic hit. Much of the reticence stems from President Xi Jinping’s government’s drive to control the growth of debt in the country, particularly at the municipal level; a desire to curb the outsized influence of the real estate sector on the economy; and a reluctance to issue western-style cash to consumers.
1. Why is China’s economy in trouble?
One keyword: property. This sector has been in a downturn since 2021 after Beijing tightened lending to major developers and ordered banks to slow mortgage lending – part of a specific policy to make the economy less dependent on real estate. Housing, along with related industries such as steel, cement and glass, accounts for about 20% of the country’s gross domestic product. As a result of these restrictions, real estate sales have fallen sharply and real estate investment has declined. Goldman Sachs Group Inc. estimates that the real estate downturn will shave 1.5 percentage points off China’s GDP growth this year. The housing crisis is also leaving local governments, which are responsible for most public spending in China, with less money because they rely on income from real estate and land sales. As a result, they have cut spending — a budget cut that UBS Group AG estimates was equivalent to one percentage point of GDP in the first half of the year. Meanwhile, exports have fallen at double-digit rates, and slower income growth and still fairly high unemployment, particularly among young people, mean consumer confidence remains subdued. Putting all these factors together, GDP growth is likely to come in at 5.1% this year, according to the latest Bloomberg survey of economists, although several Wall Street banks see the possibility of missing the official target.
2. What has Beijing done so far?
Policymakers have begun lifting funding restrictions on real estate developers and lowering mortgage costs over the past year. But with the growing threat of a doomsday loop in which developers are unable to complete their properties due to reduced cash flow, hurting buyers’ appetites and leading to further falls in sales and prices, officials have recently gone further. They are allowing major cities, which have had the most restrictive policies to date, to lower down payment requirements for home purchases, are taking steps to encourage second home purchases and are urging banks to lower interest rates on existing mortgages. Elsewhere, Beijing has ended its crackdown on internet platform companies and made pledges to better support private-sector companies and improve their access to finance. Measures have also been taken to increase funding for local governments by refinancing their existing debt at lower interest rates to support their spending and infrastructure investments, and steps have been taken to strengthen the country’s stock markets. In terms of monetary policy, the central bank has cut interest rates twice this year and taken stronger measures to support the yuan.
3. Are there more options?
The central government has stopped increasing issuance of its own debt – the most sought-after bonds because they are considered the safest – to stimulate spending as it previously did. National authorities sold special government bonds in 2020 when the pandemic hit and in 2009 to cushion the impact of the global financial crisis. Most economists believe there is still room to do so, as China’s central government debt is low by international standards and the government’s high level of control over capital flows and domestic banks gives it plenty of room to borrow. These funds could then be used for a range of different public spending options.
4. What is the “Panzerfaust” option?
Market traders use this term, which dates back to the 2008 US crisis, to denote the use of central government funds flowing directly into the economy at scale – something measured in trillions of yuan. Some economists are hoping for measures comparable to the 4 trillion yuan ($551 billion) stimulus plan announced in 2008, which was about 10% of GDP at the time. Another comparison would be to China’s use of 3 trillion yuan in central bank money to boost property sales after a slump in 2014 and 2015. Economists have suggested central government money could be used in radical ways China has never attempted before: distributing income directly to households or businesses, as the US and Europe were doing during the pandemic, or by buying up housing, to drive up prices.
5. What causes leaders to be reticent?
Although many indicators have been disappointing lately, growth is not faltering and there is still a good chance of reaching the annual target of around 5% as long as the housing market does not deteriorate. Officials are also pleased that advanced industrial sectors such as electric vehicles are doing well. President Xi and his top advisers are striving for “qualitative” growth rather than just focusing on the pace of economic expansion. They have made a point of not relying on real estate as a short-term stimulus tool and limit the accumulation of municipal debt – aiming to avoid the excesses of the past, in which debt-driven expansion led to “white elephant” projects and industrial overcapacity . Then there’s internal politics: Beijing doesn’t necessarily trust local governments to distribute money efficiently and without corruption. Cash handouts to consumers are also unlikely: Xi has warned in the past of the trap of “welfare coercion,” which senior officials said can lead to “laziness.” According to Wang Tao, UBS’s chief China economist, leaders see employment as the best way to boost consumption and believe this can be achieved by supporting the corporate sector with tax cuts. So the motto remains “targeted” economic stimulus.
Globally, a weaker GDP development as the second largest economy in the world would affect almost every country. If China’s growth rate accelerates by one percentage point, other countries will benefit by about 0.3 percentage points, according to the International Monetary Fund. Countries like Australia and Chile, which export commodities like iron ore and copper, tend to be hardest hit. China is also a big buyer of Middle Eastern oil and technology products from its East Asian neighbors. Foreign companies operating in China, from Volkswagen AG to Nike Inc. to McDonald’s Corp., are vulnerable to slower sales growth and lower stock valuations. Countries around the world that welcome Chinese tourists may see less spending. For the US, which remains China’s largest trading partner, a slowdown in the world’s second-largest economy may help bring down inflation, but probably not enough to lever the Federal Reserve unless one occurs hard landing in China. There could also be political ramifications: slower economic growth in China could lead to more domestic discontent and reduce Beijing’s global influence if it cuts credit to developing countries, for example.
– With the support of Nasreen Seria.
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