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China’s complex economic problems, including turbulence in the real estate sector, rising local government debt and weak consumption, have prompted calls for Xi Jinping to free up billions of dollars to stimulate spending, stem a slide into deflation and prop up a flagging currency.
Nevertheless, the Chinese President has refrained from providing broad-based economic stimulus. This is the latest example of how his focus on internal and external security is shaping his response to troubles in the world’s second-largest economy, analysts said.
According to Chinese political and economic experts and government advisers in Beijing, the leadership is comfortable with slower growth rates and is wary of triggering big changes that would increase public debt or create instability in the financial system.
“When you decide to spend significantly more money on something, you have to cut back on something else. . . “It’s an extremely difficult discussion considering you’re not going to cut technology investment, national defense or internal security,” said Victor Shih, a professor of Chinese political economy at the University of California, San Diego.
Yu Jie, a China expert at British think tank Chatham House, said a close reading of the Chinese government’s announcements and speeches over the past few months, including statements by the Politburo, shows that the top leadership is aware of the severity of the economic downturn .
But Beijing’s priority in the face of an increasingly hostile external environment is security and self-reliance, not economic growth, she said.
“It’s no longer about double-digit economic growth, it’s more about the search for security, about this broader sense of scientific and economic self-reliance,” she said.
In recent weeks, Chinese authorities have unveiled a range of interventions aimed at boosting growth, particularly in real estate, which accounts for more than a quarter of the country’s economic activity. To help stabilize the housing market, Guangzhou, Shenzhen, Beijing and Shanghai have broadened the definition of first-time homebuyers, while the central government has also lowered both interest rates and mortgage down payment rates.
On Friday, the People’s Bank of China cut the amount of foreign currency that financial institutions are required to hold in reserves, further supporting the renminbi, which has fallen more than 5 percent against the dollar this year. In addition, teams of central bankers and other financial experts have been dispatched to the most indebted provinces to restructure their liabilities.
Further investments in infrastructure are also expected.
And yet, after China’s July economic data broadly missed market expectations, economists have lowered their forecasts for gross domestic product growth to below the government’s target of 5 percent, while calling for stronger stimulus measures. Some have called for more support for the housing sector as the developers’ woes spill over into other parts of the financial system, and for measures to boost consumer spending.
Chinese central bankers’ priority is controlling risk, not stimulating home sales, according to a government adviser, who asked not to be named. “The central government is well aware that the real estate sector will inevitably contract,” the person said, adding that Beijing saw the adjustment as necessary in the long term as China further shifted its growth model from real estate and infrastructure development toward consumer services and High tech manufacturing.
Liqian Ren, who manages China investments at US fund WisdomTree Asset Management, said Beijing expects an expansion of central government stimulus measures on the scale seen in the US in response to the 2008 financial crisis likely to lead to higher inflation and destabilization of the Renminbi. “The US excels at being able to use fiscal stimulus without materially affecting other areas,” she said, citing the US dollar’s status as a global reserve currency.
Economists’ hopes for deeper public spending reforms — for example, increasing China’s pension and health insurance schemes to a point where people have enough security to unlock massive household savings — have also been dampened since Xi in 2019 expressed his dislike for European-style welfare systems in 2021. In an article published in the Chinese Communist Party’s Qiushi Journal, Xi warned of the limits of government support and of “falling into the trap of promoting lazy people through ‘welfare policies'” .
A key point missing from the government’s response so far is an attempt to improve government relations with private sector entrepreneurs. Andy Rothman, investment strategist at the Matthews Asia Fund, said that while fears of looming economic doom are overdone, “the biggest problem” is that Chinese entrepreneurs’ confidence has never recovered after Xi’s sweeping “shared prosperity” campaign.
The policies, introduced in 2021 in the name of reducing social inequality, also aimed to restore party control over the country’s billionaire class, whose influence had grown through decades of economic growth. But the policies shook confidence, robbed trillions of dollars from Chinese company share prices and created an overwhelming sense of regulatory uncertainty.
“They need to be convinced that these over-regulatory efforts will be rolled back and that they are now free to do business and that the government will step out of their way,” Rothman said, noting that private sector entrepreneurs are not The country was not only responsible for the largest wealth accumulation and GDP growth in China, but also employed the bulk of the urban workforce.
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The start of such a complicated series of economic problems would pose a challenge to the political authority of other world leaders, but experts noted that Xi’s rise to power was unaffected.
Lance Gore, an expert on Chinese politics and economics at the National University of Singapore, said a deeper economic downturn would worry Xi, who last year secured an unprecedented third five-year term as head of the party and military. The Chinese President installed a leadership team that stands for one quality above all: loyalty.
While the 24-strong Politburo once struck a balance between business experience and ideological leanings, Xi has filled key positions with mostly trusted leaders with whom he has worked for decades and rising stars who have proven their trustworthiness and alignment with his own views have asked. This means that despite last year’s protests against Xi’s coronavirus controls and record-breaking youth unemployment, no one is likely to question Xi’s wisdom.
“The other part of the story is that during those years of rapid Chinese growth, the state wasted no time building its own country [state security] machines,” Gore said. “He doesn’t want to use it, but it’s available.”
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