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CNN
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Every few days for the past few weeks, a parade of Chinese leaders has publicly vowed to do more to boost the flagging economy, mostly by promising to support the ailing private sector.
At times, investors seem to have gained confidence from these commitments, which has pushed stock prices higher.
For the most part, however, they have ignored the barrage of official news, hoping for more concrete stimulus measures that economists and analysts tell CNN are now unlikely to come because China is too indebted to simply boost the economy like it is was the case 15 years ago. during the global financial crisis.
“We’ve already made a lot of vague promises that haven’t achieved much so far,” said Robert Carnell, Asia Pacific regional research director at ING Group.
Aside from some incremental measures to support the housing market, which is currently mired in its worst crisis in history, and interest rate adjustments, there is little sign of the government making real money available to struggling consumers or businesses.
“It seems unlikely that Chinese policymakers will implement major monetary or fiscal stimulus, likely worried that doing so could exacerbate China’s growing debt risks,” said Craig Singleton, a senior China fellow at the Foundation for Defense of Democracies, a nonpartisan think tank based in Washington.
“The most we can expect is flimsy, mostly supply-side policies, ostensibly aimed at attracting more private capital and boosting EV ownership, among other things,” he added.
After a strong start to the year following the lifting of Covid restrictions, the world’s second largest economy has lost momentum.
Since April, a spate of disappointing economic and population data has raised concerns that China is entering a period of much slower growth and may even be poised for a future comparable to Japan’s.
China’s economy barely grew quarter-on-quarter in April-June as a first upswing in economic activity after the end of pandemic restrictions eased. Signs of deflation are mounting, fueling fears that China could enter an extended period of stagnation.
cnsphoto/Reuters
China’s exports contracted much faster than expected in May and imports also fell. Manufacturers struggled to find demand abroad and domestic consumption remained subdued.
Based on Japan’s experience in the 1990s, China is at risk of falling into a “liquidity trap,” a scenario in which monetary policy becomes largely ineffective and consumers hold on to their cash rather than spend it, said chief economist Alicia Garcia-Herrero for the Asia-Pacific region at Natixis, a French investment bank.
“In other words, there is a risk that Chinese companies and households, driven by their very negative view of the economic outlook, may prefer to divest and deleverage amid declining revenue generation.”
According to analysts, to get the economy back on track, Beijing must follow its words with action.
According to analysts at UBS Global Wealth Management, China “conspicuously” refrained from the huge support seen in developed economies during the Covid era. Fiscal stimulus, for example, was only a third of the support offered in the United States, without nationwide spending.
While this helped China avoid the rampant inflationary shock seen elsewhere, household disposable income fell while wages and property values faltered at the same time, a recent research note said.
interest Rate cuts are not enough unless accompanied by fiscal measures to stimulate demand.
“A comprehensive policy mix – encompassing monetary and fiscal stimulus, including infrastructure, housing and consumption, as well as structural reforms” would be helpful in restoring confidence, they said.
China’s economic development is of great concern to global investors and policymakers, who expect China to drive global expansion. But Beijing appears to be out of ammunition.
Back in 2008, Chinese leaders put together a 4 trillion yuan ($586 billion) budget package to mitigate the impact of the global financial crisis. It was considered a success and helped boost Beijing’s political standing at home and abroad, as well as China’s economic growth, which surged to over 9% in the second half of 2009.
But the measures, which have focused on government infrastructure projects, have also resulted in unprecedented credit expansion and a massive rise in local government debt, from which the economy is still struggling to recover. In 2012, Beijing said it would not do anything like this again. The costs were just too high.
China’s debt problems have only worsened during the Covid-19 pandemic, as three years of draconian restrictions and a real estate downturn drained local government coffers.
Analysts estimate that China’s outstanding national debt topped 123 trillion yuan ($18 trillion) last year. Nearly $10 trillion of that is so-called “hidden debt” owed by risky local government funding platforms.
In June, Zhu Min, a former senior International Monetary Fund official who previously worked at China’s central bank, was quoted by Bloomberg as saying he said at the Summer Davos Forum in Tianjin that he didn’t believe China The nation was already struggling with high levels of debt before it would announce massive stimulus measures.
“NO [fiscal stimulus] “A new debt crisis has been announced, suggesting that Chinese politicians still have concerns about the public debt rising too quickly,” Garcia-Herrero said.
And even if Beijing did take action, it would be less effective than it was in 2008, Garcia-Herrero said.
“An infrastructure-based fiscal stimulus would need to be much larger to produce the same economic impact,” she said.
It also implies that if measures are taken, China’s public debt would rise well above the current 100% of GDP, making the economy “one of the most indebted in the world,” she added.
Worse still, under President Xi Jinping, Beijing appears to have doubled down on its strategy to strengthen the party’s control of the economy, analysts said.
According to Derek Scissors, a senior fellow at the American Enterprise Institute, a “correct response” to the economic downturn would be for Beijing to return to a market-oriented reform trajectory and give the private sector a bigger role.
However, there is “limited evidence” that the government is considering that direction, he said.
According to Singleton, “China’s new economic leadership team has few tools to meaningfully revive growth.”
“Beijing’s persistent, if unsurprising, refusal to recognize the role that Xi’s economic mismanagement has played in aggravating China’s problems” will greatly exacerbate its broader systemic risks, he said.
The real estate sector is likely to hold back growth in the coming years, Singleton said, adding that the country’s alarming debt level and shy consumers at home and abroad aren’t helping either.
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