China's Economy Faces Unprecedented Demand Challenge
China's economic situation is unlike any previous analogies. While the nation's growth over the past four decades has been remarkable, it currently grapples with unique difficulties – a problem that can be described as a "recessionary growth" rather than a full-blown crisis. Unlike Japan in 1990, Korea in 1997, or the US in 2008, China's economic troubles are distinct.
The critical issue at hand is a chronic lack of demand despite the ongoing economic growth. This is evident in two key statistics: the consumer price index, which is hovering on the brink of deflation with flat year-on-year prices in June, and the soaring youth unemployment rate of 21.3% in the same month. In short, the economy is experiencing a situation where spending fails to keep pace with available productive resources.
This lack of demand poses a real threat of a deflationary spiral, and the authorities must respond proactively to prevent further damage. Consumers have been impacted by last year's zero-Covid policies, which enforced lockdowns without significant government financial aid, leading to financial strain for households. As a result, consumers have become more cautious about spending, hindering economic recovery.
Private corporations are reluctant to invest in several sectors due to regulatory crackdowns, export controls, and subdued consumption. In contrast, investments in certain favored sectors such as electric vehicles and green energy continue on a massive scale.
Typically, the Chinese government might turn to housing and infrastructure investment as stimulus measures. However, concerns arise regarding a potential balance sheet recession, with over-leveraged property developers like Evergrande creating anxieties. Stabilizing property prices is essential as they constitute a considerable share of household wealth and contribute significantly to local government revenues.
Nevertheless, the problem does not lie in existing debts but in the prospects for new economic activities. Ageing demographics and outmigration have saturated housing demand in several regions, making additional building in major cities a potential solution with its trade-offs. Incremental spending on infrastructure remains an option, but it comes with diminishing returns and accumulates more debt.
Two sources of demand, trade, and government spending, are crucial for the economy. China's current account surplus indicates weak domestic demand and potential for ultra-competitive Chinese exports. However, exporting deflation may lead to long-term economic costs for the global community.
To achieve sustainable economic success, China's central government, being one of the least indebted in the world, can transfer cash to households to boost consumption and stimulate the economy. Although a politburo meeting discussed various policies, concrete action and financial support are yet to be seen.
Taking prompt and strategic actions to address the demand deficit will be critical for China to sustain its remarkable economic trajectory, while the global community should closely monitor the developments. By adopting effective interventions, China can foster a resilient and thriving economy.
Source: Financial Times
