June 25, 2024

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Why is the Chinese economy slowing down and could it worsen?

Why is the Chinese economy slowing down and could it worsen?

HONG KONG (Reuters) – China’s economic growth is slowing as policymakers try to fix a slowdown in the real estate market, with an eye on problems at major developer Country Garden. Concerns are growing about whether the world’s second-largest economy is approaching crisis point:

What causes the economic slowdown in China?

Unlike consumers in the West, the Chinese people have been largely left to fend for themselves during the COVID-19 pandemic, and the retaliatory spending spree some economists predicted did not happen after China reopened.

Moreover, demand for Chinese exports has slumped as major trading partners suffer from rising costs of living.

With 70% of Chinese household wealth tied to real estate, the significant slowdown in this sector is spreading to other parts of the economy.

There have been major concerns about China’s economy before. Is this time different?

Alarm bells sounded about the economy during the global financial crisis of 2008-2009 and during the capital outflow panic of 2015. China revived confidence at that time by shockingly boosting investment in infrastructure and by encouraging speculation in the real estate market, Among other measures.

But modernizing infrastructure created huge amounts of debt, and the real estate bubble burst, which poses risks to financial stability today.

With China’s debt-fueled investment in infrastructure and real estate peaking and exports slowing in line with the global economy, China has only one other source of demand to adjust: household consumption.

In this sense this slowdown is different.

China’s ability to recover depends largely on its ability to persuade households to spend more and save less, and whether it can do so to such an extent that consumer demand compensates for weaknesses elsewhere in the economy.

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Why is low household spending a problem?

Household consumption, as a share of GDP, was among the lowest in the world even before COVID-19, with economists describing it as a major structural flaw in an economy that relies heavily on debt-fueled investment.

Economists blame weak domestic demand for lower investment appetite in the private sector and for China’s slide into recession in July. If deflation continues, it could exacerbate the economic slowdown and deepen debt problems.

The imbalance between consumption and investment is deeper than in Japan before it entered the “lost decade” of stagnation in the 1990s.

China’s household spending as a share of GDP lags that of most other countries.

Is China’s economic slowdown getting worse?

The weak data readings prompted some economists to point to the risk that China may struggle to meet its economic growth target of around 5% for 2023 without more government spending.

A growth rate of around 5% is still much higher than many other major economies would achieve, but for a country that invests close to 40% of its GDP each year—about twice as much as the United States—economists say that figure is It remains disappointing.

There is also uncertainty about the government’s appetite for significant fiscal stimulus, given high levels of municipal debt.

China’s debt will be 3 times its GDP in 2022

The pressure in the real estate market, which accounts for about a quarter of economic activity, raises more concerns about the ability of policymakers to stem the decline in growth.

Some economists warn that investors will have to get used to much lower growth. A minority even raises the possibility of a Japan-style recession.

Real estate sector performance from January to July

But other economists say many consumers and small businesses may already be feeling the economic pain as deep as they did during the recession, given youth unemployment rates of more than 21% and deflationary pressures hitting profit margins.

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Will lower interest rates help?

Major Chinese banks on Friday slashed interest rates on a range of yuan deposits, to ease pressure on their profit margins and allow them to cut lending costs for borrowers, including by lowering mortgage rates.

While policymakers hope that lower interest rates will boost consumption, economists warn that the accompanying deposit rate cuts divert money from consumers who save to those who borrow. Resource transfers from the government sector to households would have a more pronounced effect in the long run.

Lowering interest rates may also create risks of yuan depreciation and capital outflows, which China will be keen to avoid.

China’s central bank said on Friday it will cut the amount of foreign exchange that financial institutions must hold as reserves 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 will boost the share of household consumption in GDP.

Options include government-funded consumer vouchers, deep tax cuts, encouraging faster wage growth, and building a social safety net with higher pensions, unemployment benefits, and better and more widely available public services.

No such steps were mentioned at a recent meeting of the Communist Party leadership, but economists are looking forward to a major party congress in December for deeper structural reforms.

Reporting by Marius Zaharia. Editing by Robert Purcell and Neil Volek

Our standards: Thomson Reuters Trust Principles.

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