HONG KONG, Sept 1 (Reuters) – China’s economic growth is slowing as policymakers try to fix a slumping property market, focusing on problems in key developer Country Garden. Concerns are mounting that the world’s second-largest economy is nearing crisis point:
What caused China’s economic slowdown?
Unlike consumers in the West, Chinese people were largely left to fend for themselves during the Covid-19 pandemic and the retaliatory spending that some economists expected after China reopened never materialized.
Also, demand for Chinese exports is slowing as key trading partners struggle with rising living costs.
And with 70% of Chinese household wealth tied up in real estate, a major slowdown in the sector is trickling down to other parts of the economy.
Before this there were major concerns over China’s economy. Is this time different?
Alarm bells rang on the economy during the global financial crisis in 2008-09 and the fear of capital flight in 2015. China restored confidence with a shock boost to infrastructure investment and fueled property market speculation.
But infrastructure upgrades have created more debt, and an asset bubble has burst, posing risks to financial stability today.
With China’s debt-fueled investment in infrastructure and property peaking and exports slowing in line with the global economy, China has only one other source of demand: domestic consumption.
In that sense, this recession is different.
Whether China bounces back depends on whether it can get households to spend more and save less, and whether they do so enough that consumer demand compensates for weaknesses elsewhere in the economy.
Why is low family spending a problem?
Household consumption, as a percentage of gross domestic product (GDP), was the lowest in the world before Covid, which economists have identified as a key structural imbalance in an economy heavily reliant on debt-fueled investment.
Economists blame weak domestic demand for dampening investment appetite in the private sector and China’s slide into deflation in July. If this continues, deflation will exacerbate the recession and deepen debt problems.
The imbalance between consumption and investment is deeper than it was before Japan entered the „lost decade” of stagnation in the 1990s.
Will China’s economic slowdown get worse?
The weak data readings have prompted some economists to flag the risk that China will struggle to meet its economic growth target of 5% for 2023 without higher government spending.
That’s a growth rate of around 5%, still higher than that achieved by many other major economies, but for one that invests around 40% of its gross domestic product each year – twice as much as the US – economists say it remains a disappointing figure.
Given the high levels of municipal debt, there is also uncertainty about the government’s appetite for major fiscal stimulus.
Stress in the property market, which accounts for a quarter of economic activity, raises further concerns about policymakers’ ability to stem a slowdown in growth.
Some economists warn that investors should get used to much lower growth. A minority of them even raise the possibility of a Japan-like stagnation.
But other economists say many consumers and small businesses may already feel deep economic pain during the recession, with the youth unemployment rate above 21% and deflationary pressures weighing on profit margins.
Will interest rate cuts help?
Major Chinese banks on Friday cut interest rates on yuan deposits to ease pressure on their profit margins and cut lending rates to borrowers, including cutting mortgage rates.
While policymakers believe lower rates will boost consumption, economists warn that deposit rate cuts will be accompanied by a transfer of funds from consumers saving to borrowers. Shifting resources from the government sector to households can have a more meaningful long-term impact.
Rate cuts could also create risks of yuan depreciation and capital outflows, which China would be keen to avoid.
China’s central bank said on Friday it would reduce the amount of foreign exchange that financial institutions are required to hold in reserve for the first time this year to counter pressure on the yuan.
What more can the Chinese government do?
Economists want to see measures that increase the share of household consumption in GDP.
Options include government-sponsored consumer vouchers, substantial tax cuts, encouraging faster wage growth, higher pensions, unemployment benefits, and building a social safety net with better, more widely available public services.
No such measures were flagged at the recent Communist Party leadership meeting, but economists expect a major party conference in December to push for even deeper structural reforms.
(Reporting by Marius Zaharia; Editing by Robert Birzel and Neil Fullick)
„Oddany rozwiązywacz problemów. Przyjazny hipsterom praktykant bekonu. Miłośnik kawy. Nieuleczalny introwertyk. Student.