When China suddenly lifted its lockdowns and other Covid precautions last December, officials in Beijing and many investors expected the economy to come back to life.
It hasn’t worked out that way.
Investments in China have stagnated this spring after a flurry of activity in the late winter. Exports are shrinking. Fewer and fewer new housing projects are being started. Prices are falling. More than one in five young people are unemployed.
China has tried many fixes in recent years when the economy was flagging, such as heavy borrowing to pay for roads and rail lines. And it spent huge sums on testing and quarantines during the pandemic. Extra stimulus spending now with borrowed money would spur a burst of activity, but present a difficult choice for politicians already worried about the accumulated debt.
“Governments run the risk of being behind the curve in stimulating the economy, but there is no quick fix,” said Louise Loo, an economist specializing in China at Oxford Economics’ Singapore office.
China must straighten out its economy after shutting itself off from the world for nearly three years to fight Covid, a decision that prompted many companies to start moving their supply chains elsewhere. Xi Jinping, China’s leader, met Monday with US Secretary of State Antony J. Blinken in an effort by the two nations to ease diplomatic tensions and clear the way for high-level economic talks in the coming weeks. Such discussions could slow the recent proliferation of sanctions and countermeasures.
China’s stalling economic recovery has seen only a few categories of spending grow strongly, such as travel and restaurant meals. And these have increased compared to extremely low levels in the spring of 2022, when a two-month shutdown in Shanghai disrupted economic activity across large areas of central China.
The economy has been particularly weak in recent weeks.
“From April to May until now, the economy has experienced significant unexpected changes, to the point where some believe that the initial judgments may have been overly optimistic,” Yin Yanlin, a former deputy director of the Chinese Communist Party’s Supreme Commission for Economic Policy. , said in a speech at an academic conference on Saturday.
Chinese government officials have dropped hints that an economic stimulus plan may be imminent.
“In response to the changes in the economic situation, more forceful measures must be taken to increase the progress of development, optimize the economic structure and promote a continuous recovery of the economy,” the country’s Cabinet, or Cabinet, said after a meeting on Friday led by Li Qiang, the country’s new premier.
China’s economic weakness has benefits and dangers for the global economy. Consumer and producer prices have fallen over the past four months in China, putting a brake on inflation in the West by pushing down the cost of imports from China.
But weak demand in China could exacerbate a global slowdown. Europe already went into a mild recession early this year. Rapid interest rate increases in the US have led some investors to bet on a recession late this year there as well.
Beijing has already taken some steps to revitalize economic growth. Tax breaks are being introduced for small businesses. Interest rates on bank deposits have been reduced to encourage households to spend more of their money rather than save it. The latest government measure is expected on Tuesday, when the state-controlled banking system is likely to slightly reduce its benchmark interest rates for business and home loans.
But many economists, inside and outside China, worry about the effectiveness of the new measures.
Consumers are hoarding money and investors are wary of putting money into China’s companies. Private investment is actually down so far this year compared to 2022. Housing remains in crisis, with developers borrowing more to pay off existing debt and to complete existing projects, even though China is already suffering from a housing oversupply.
China’s housing market is at the heart of the problems. Construction has accounted for as much as a quarter of China’s economic output. But potential homeowners have been put off as developers have defaulted on their debts and failed to complete apartments buyers had paid for in advance.
Housing construction has fallen by almost 23 per cent in the first five months of the year, compared to the same months last year. This suggests that the real estate sector must fall further in the coming months.
Chen Leiqian, a 27-year-old marketer in Beijing, started looking for an apartment with his girlfriend in 2021 after five years of dating. But they decided to stay in a rental apartment when they got married.
“Home prices across the country are falling, and the economy is very bad — there are just too many unstable elements,” Chen said.
Two-thirds of Chen’s co-workers in her department at an online tutoring company were laid off after China cracked down on the for-profit, private education industry in 2021. She also had a friend who could no longer pay her mortgage after losing a job in the tech sector, and lost her home in forced auction.
The wariness of middle-class families like the Chens may pose 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’re not safe, they won’t spend,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, a French bank.
Households are not alone in struggling to pay their debts – so are local governments, which have limited their ability to increase spending on infrastructure.
The government is wary of starting another credit binge of the kind seen in 2009, during the global economic collapse, and in 2016, after China’s stock market plunged the previous year.
Although the failing real estate sector has hurt demand in China, exports have been flat this year and actually fell in May. The weakness in China’s normally robust exports is particularly notable because 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 can compensate for the otherwise sluggish domestic economy. But it is not clear how much China will be able to count on exports to help, as some of China’s biggest trading partners have shifted some purchases to other countries in Asia.
In the United States, the Trump administration imposed tariffs on a wide range of Chinese manufactured goods, making it more expensive for American companies to buy from China. Then President Biden persuaded Congress last year to approve broad subsidies for American manufacturing in categories such as electric cars and solar panels. China’s exports to the US fell 18.2 percent last month compared to May last year.
As China considers how to strengthen its economy, the country must contend with a loss of consumer confidence.
Charles Wang runs a small travel company with eight employees in Zhangjiakou, northern China. His business has almost recovered after the pandemic, but he has no plans to invest in expansion.
“Our economy is actually going down, and everyone doesn’t have as much time and will to spend,” Wang said. “It’s because people just don’t want to spend money – everyone is scared again, even the rich.”
Li you contributed research.