When China suddenly lifted its lockdowns and other Covid precautions last December, officials in Beijing and many investors expected the economy to bounce back.
It didn’t work out that way.
Investment in China has stagnated this spring after a surge of activity in late winter. Exports are shrinking. Fewer and fewer new housing projects are being started. Prices are falling. More than one in five young people is unemployed.
China has tried many solutions in recent years as the economy slumped, such as heavy borrowing to pay for roads and rail lines. And it has spent huge amounts of money on testing and quarantines during the pandemic. Additional stimulus spending now with borrowed money would spur a burst of activity, but pose a tough choice for policymakers already worried about the accumulated debt.
“Authorities risk falling behind in stimulating the economy, but there is no quick fix,” said Louise Loo, an economist specializing in China in Oxford Economics’ Singapore office.
China must recover its economy after shutting itself off from the world for nearly three years to battle Covid, a decision that has prompted many companies to move their supply chains elsewhere. China’s leader Xi Jinping met with United States Secretary of State Antony J. Blinken on Monday in a bid by the two nations to ease diplomatic tensions and pave the way for economic talks at a high level in the coming weeks. Such discussions could slow down the recent increase in sanctions and countermeasures.
Due to the stagnating economic recovery in China, only a few spending categories have grown strongly, such as travel and restaurant meals. And they have risen from extremely low levels in spring 2022, when a two-month lockdown in Shanghai disrupted economic activity in much of central China.
The economy has been particularly weak in recent weeks.
“From April to May to now, the economy has undergone significant unexpected changes, to the point where some people think the initial judgments may have been overly optimistic,” said Yin Yanlin, a former deputy director of the country’s top economic policy-making committee. Chinese Communist Party. said in a speech at an academic conference on Saturday.
Chinese government officials have been dropping hints that an economic stimulus plan is imminent.
“In response to the changes in the economic situation, stronger measures should be taken to strengthen the momentum of development, optimize the economic structure and promote the continued recovery of the economy,” said the country’s State Council or Cabinet after a meeting on Friday led by Li Qiang, the country’s new prime minister.
China’s economic weakness poses both benefits and threats to the global economy. In China, consumer and producer prices have fallen over the past four months, curbing inflation in the West by depressing import costs from China.
But weak demand in China could exacerbate a global slowdown. Europe already entered a mild recession at the beginning of this year. Rapid interest rate rises in the United States have prompted some investors to bet on a recession there as well by the end of this year.
Beijing has already taken some steps to revive economic growth. Tax benefits are introduced for small businesses. Interest rates on bank deposits have been cut to encourage households to spend more of their money rather than save. The latest government action is expected on Tuesday, when the state-controlled banking system is likely to slightly cut benchmark interest rates on corporate and residential mortgages.
But many economists, inside and outside China, are concerned about the effectiveness of the new measures.
Consumers are hoarding cash and investors are hesitant to put money into Chinese companies. Private investment has actually fallen this year compared to 2022. The housing market remains in crisis, with developers borrowing more to pay off existing debt and to complete existing projects, while China already suffers from an oversupply of housing.
The Chinese housing market is at the heart of the problems. Construction accounts for as much as a quarter of China’s economic output. But potential homeowners have been put off because developers failed to pay their debts and finish the apartments that buyers prepaid for.
Housing construction fell by almost 23 percent in the first five months of the year compared to the same months last year. This suggests that the real estate sector will continue to decline in the coming months.
Chen Leiqian, a 27-year-old marketer in Beijing, started looking for an apartment with her boyfriend in 2021 after five years of dating. But when they got married, they decided to stay in a rented apartment.
“House prices across the country are falling and the economy is very bad – there are just too many unstable elements,” Ms Chen said.
Two-thirds of Ms Chen’s colleagues in her department at an online tutoring company were laid off after China cracked down on the for-profit private education sector in 2021. She also had a friend who couldn’t afford a mortgage after losing a job in the tech industry and losing the house to foreclosure.
The caution of middle-class families like Ms. Chen’s is perhaps the biggest dilemma for policymakers as they search for an effective formula for another round of economic stimulus.
“You can throw money at people, but if they don’t have confidence, they won’t spend,” said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, a French bank.
Households are not the only ones struggling to pay off their debts, as are local governments, which have limited their ability to ramp up infrastructure spending.
The government is wary of starting another credit crunch like in 2009, during the global financial meltdown, and in 2016, after China’s stock market crashed last year.
While the slumping real estate sector has hurt demand in China, exports remained flat this year, even falling in May. The weakness in China’s normally strong exports is particularly notable as Beijing has allowed its currency, the renminbi, to lose about 7 percent of its value against the dollar since mid-January. A weaker renminbi makes Chinese exports more competitive in foreign markets.
More exports help create jobs and could offset the otherwise sluggish domestic economy. But it’s not clear how much China will be able to count on exports to help, as some of China’s largest trading partners have shifted some purchases to other countries in Asia.
In the United States, the Trump administration imposed tariffs on a wide variety of Chinese industrial goods, making it more expensive for American companies to buy from China. Then last year President Biden persuaded Congress to allow broad subsidies for US manufacturing in categories such as electric cars and solar panels. Exports from China to the United States fell by 18.2 percent last month compared to May last year.
As China considers how to strengthen its economy, it must contend with a loss of consumer confidence.
Charles Wang runs a small travel agency with eight employees in Zhangjiakou, northern China. His business has almost fully recovered from the pandemic, but he has no plans to invest in expansion.
“Our economy is actually in decline, and not everyone has that much time and willingness to spend,” said Mr. Cheek. “It’s because people just don’t want to spend money — everyone is scared again, even the rich.”
Li you contributed research.
