In recent weeks, Beijing has announced a flood of stimulus measures — or plans for such measures — as alarm bells grow louder in China’s economy.
The central bank has cut several lending rates, reduced bank reserve requirements and provided more liquidity to the stock market. Officials also pointed to easing local government debt and a weakened real estate market.
But the government has not yet disclosed a solid plan big fiscal bazooka this will put more money in consumers’ pockets to stimulate demand. On Saturday, the much-anticipated speech The Finance Ministry disappointed economists even more Teasing that there is plenty of room for more government spending and then suggesting that further steps may be announced.
After the Chinese real estate bubble burst a few years ago, consumers were reluctant to spend signs of deflation began to set in. But partly because of its disdain for “welfare,” China has been reluctant to offer large direct subsidies to consumers.
Instead of unleashing massive fiscal transfers, as the US did during the pandemic, through stimulus controls, China has relied. a decade-long strategy to support industrial production above all else, driving the flood of production domestically and exports abroad.
Without further support from the demand side, China’s rate cuts could worsen the economy further by exacerbating the problem of deflation. A big reason is that China’s growth is based more on production and investment than consumption, unlike in the US.
So while the Federal Reserve’s rate cuts may cause Americans to take on more debt to buy cars or big-ticket items, that’s not the case in China.
According to Peking University finance professor Michael Pettis, China’s financial system is primarily geared towards the supply side of the economy. In particular, credit is channeled through companies, state-owned enterprises, local governments and the central government to infrastructure, property and manufacturing, he wrote on August 21. Release for the Carnegie Endowment for International Peacewhere he is also a non-resident senior fellow.
The effect of the additional money supply is that firms increase their output, which then forces them to become more price competitive.
“That’s probably the combination of a very inflationary global environment and China’s rapid credit and money growth that has been associated with deflation in China, not inflation,” Pettis explained.
On the 7th of August interview on CNBCHe also touched on China’s demand problem, saying households have seen their incomes grow slowly while economic uncertainty has dampened their willingness to spend.
On the supply side, Chinese manufacturers are extremely competitive, largely due to weak domestic incomes, Pettis added.
Zongyuan Zoe Liu, a China researcher at the Council on Foreign Relations, warned of industry overcapacity. Foreign Affairs the magazine recently
“In short, in many crucial economic sectors, it is producing far more output than China or foreign markets can sustainably absorb,” he said. “As a result, China’s economy risks being caught in a vicious circle of falling prices, insolvency, factory closures and ultimately job losses.”
When profits shrink, companies increase production and cut prices lower to generate enough cash to service debt, Liu explained, adding that government-designated priority sectors sell products below cost to meet political goals.
This dynamic is destabilizing the global market with a flood of cheap Chinese exports a sharp reaction in the form of hard tariffs. The domestic market is also marked by overproduction and price competition, which risks sending the economy into deflation, Liu warned.
“Also, while China’s vibrant e-commerce sector may suggest a wealth of consumer options, in reality, major platforms such as Alibaba, Pinduoduumand Shein competes fiercely to sell the same merchandise products,” he said.
