HONG KONG, Sept 1 (Portal) – China’s economic growth is slowing as policymakers try to address a downturn in the property market, with problems at major developer Country Garden taking center stage. Concern is growing about whether the world’s second-largest economy is getting closer to a crisis point:
WHAT CAUSES CHINA’S ECONOMIC DEFINITION?
Unlike consumers in the West, Chinese people were largely left to fend for themselves during the COVID-19 pandemic, and the revenge spending spree some economists expected after China reopened never materialized.
Additionally, demand for Chinese exports has weakened as key trading partners struggle with rising living costs.
And with 70% of China’s household wealth tied up in real estate, a sharp slowdown in the sector is also affecting other parts of the economy.
There have been major concerns about the Chinese economy before. IS THIS TIME DIFFERENT?
Alarm bells rang for the economy during the global financial crisis of 2008/2009 and during the fear of capital outflows in 2015. China revived confidence at the time with, among other things, a shocking increase in infrastructure investment and encouraging speculation in the real estate market.
But infrastructure modernization created too much debt and the housing bubble burst, posing risks to financial stability today.
With China’s debt-fueled investment in infrastructure and real estate at its peak and exports slowing in line with the global economy, China has only one more source of demand to tinker with: household consumption.
In that sense, this slowdown is different.
Whether China gets back on its feet depends largely on whether it can convince households to spend more and save less, and whether they will do so to such an extent that consumer demand will offset weaknesses in other areas of the economy.
WHY IS LOW HOUSEHOLD SPENDING A PROBLEM?
Household consumption as a percentage of gross domestic product (GDP) was already among the lowest in the world before the coronavirus crisis, with economists identifying it as a key structural imbalance in an economy over-reliant on debt-driven investment.
Economists blame weak domestic demand for the dampened appetite for investment in the private sector and for China sliding into deflation in July. If it continues, deflation could deepen the economic downturn and worsen debt problems.
The imbalance between consumption and investment is greater than it was in Japan before the country entered its “lost decade” of stagnation in the 1990s.
China’s household spending as a share of GDP lags behind most other countries.
Will China’s economic downturn get worse?
Weak data readings have led some economists to point to the risk that China could struggle to meet its economic growth target of around 5% for 2023 without higher government spending.
About 5% is still a much higher growth rate than many other major economies, but for an economy that invests about 40% of its GDP each year — about twice as much as the United States — that’s still a disappointing figure, economists say.
Given the high level of municipal debt, there is also uncertainty as to whether the government wants major economic stimulus.
China’s debt was three times GDP in 2022
Tensions in the housing market, which accounts for about a quarter of economic activity, raise further concerns about policymakers’ ability to halt the slowdown in growth.
Some economists warn that investors will have to get used to significantly lower growth. A minority of them even hold out the prospect of stagnation like in Japan.
Performance of the real estate sector from January to July
But other economists say many consumers and small businesses may already be feeling economic pain as severe as during a recession, with youth unemployment rates topping 21% and deflationary pressures weighing on profit margins.
Will interest rate cuts help?
Major Chinese banks on Friday cut interest rates on a range of yuan deposits to ease pressure on their profit margins and give themselves scope to reduce borrowing costs for borrowers, including by lowering mortgage rates.
While policymakers hope that lower interest rates would boost consumption, economists warn that the accompanying cuts in deposit rates will lead to a transfer of money from consumers who save to those who borrow. Transferring resources from the state sector to private households would have a more significant long-term impact.
Interest rate cuts may also bring the risk of yuan devaluation and capital outflows, which China is keen to avoid.
China’s central bank said on Friday it will reduce for the first time this year the amount of foreign currency that financial institutions must hold as reserves to counter pressure on the yuan.
What else can China’s government do?
Economists would like to see measures that would increase the share of private consumption in GDP.
Options include government-funded consumer vouchers, significant tax cuts, encouraging faster wage growth, building a social safety net with higher pensions, unemployment benefits and better and more widely accessible public services.
No such moves were announced at a recent meeting of the Communist Party leadership, but economists expect deeper structural reforms at a key party congress in December.
Reporting by Marius Zaharia; Edited by Robert Birsel and Neil Fullick
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