HomeTrendingAs Chinese economy sinks, will things get worse for China?

As Chinese economy sinks, will things get worse for China?

Retail sales, industrial output, and investment figures for China’s economy for July fell short of forecasts, raising fears of a more significant and protracted downturn in development.

Since the start of the second quarter, activity indicators have fallen short of expectations, and this weakness has led to concerns that China’s economy is getting near to a breaking point.

Not for the first time, either.

The 2008–2009 global financial crisis and a potential capital outflow worry in 2015 both raised concerns about growth. China emerged from them with various measures, including a surprise increase in infrastructure spending and encouragement of real estate market speculation.

However, the property bubble has already burst and infrastructure improvements have generated an excessive amount of debt, putting financial stability at danger.

Given that China’s debt-fueled investment in real estate and infrastructure has peaked and that exports are falling along with the rest of the world’s economy, the country’s family spending is the sole remaining source of demand that can be altered.

This slowing is distinct in that regard.

China’s ability to recover essentially hinges on its ability to persuade consumers to spend more and save less, and if they will do so to such an extent as to make up for deficiencies in the economy elsewhere through increased consumer demand.

During the COVID-19 epidemic, unlike consumers in the West, Chinese citizens were mostly left to fend for themselves, and the retaliation spending frenzy that some economists anticipated once China reopened never happened.

However, even prior to COVID, household consumption as a share of GDP was among the lowest in the world. Economists identified this as a critical structural mismatch in an economy that placed an undue emphasis on debt-fueled investment.

The lack of investment enthusiasm in the private sector and China’s entry into deflation in July are both attributed to weak domestic demand, according to economists. Deflation has the potential to exacerbate the current economic slump and increase debt issues if it continues.

The gap between investment and consumption is wider than it was for Japan before to the start of that country’s “lost decade” of economic stagnation in the 1990s.

Some experts have warned that without additional fiscal stimulus, China may find it difficult to achieve its annual growth objective of around 5% as a result of the July activity figures.

Even though it is still significantly better growth than many other major economies will experience, the outcome is nonetheless disappointing for a country that invests nearly 40% of its GDP annually, or about twice as much as the United States does.

Given the huge amounts of municipal debt, there is also the question regarding China’s willingness to implement significant fiscal stimulus.

Concern over the ability of authorities to stop the decrease in growth is further heightened by the stress in the real estate market, which makes up approximately a quarter of all economic activity.

A few experts caution that investors will need to adjust to significantly slower growth. Some of them even mention the possibility of stagnation similar to that in Japan.

However, other economists assert that given youth unemployment rates above 21% and deflationary pressures pushing on profit margins, many consumers and small companies may already be experiencing economic suffering on a par with that experienced during a recession.

Tuesday’s interest rate reduction by China’s central bank caught markets off guard.

The major purpose of the cutbacks, according to analysts, is to signal to the markets that the government is prepared to stimulate the economy. However, they are too minor to have a significant impact.

Deeper cuts could increase the risk of the yuan depreciating and capital flight, both of which China will be keen to prevent.

Economists favour policies that would increase the GDP share of home consumption.

Government-funded consumer vouchers, large tax reductions, promoting quicker wage growth, constructing a social safety net with greater pensions, unemployment benefits, and better, more accessible public services are some alternatives.

A recent Communist Party leadership meeting did not discuss such actions, but analysts are anticipating more significant structural adjustments at the party conference in December.