China’s Stimulus Pivot Is Prompted by Fears Slowing Growth Could Worsen
Senior leaders, taking economic pulse in recent weeks, decide they can’t risk waiting for growth to resume
A few months ago, Chinese leaders were basking in signs that the world’s second-largest economy was rebounding sharply after three years of tough Covid-19 controls.
By April and May, however, disturbing reports were trickling in. Teams sent to conduct surveys of local-government finances returned to Beijing with news that officials were struggling to repay debts, people familiar with the matter said. Government meetings with regional business leaders revealed that confidence remained weak, even after the unexpected lifting of Covid restrictions late last year.
Official data painted an increasingly bleak picture of an economy losing steam. The weakened property market showed signs of renewed stress, and youth unemployment hit a record high. Many people in China were saying privately that they no longer believed Beijing cared about promoting economic growth.
All those concerns helped prompt a rethink in Beijing during the past few weeks, people familiar with the discussions said. Senior officials abruptly committed to do more to stimulate growth, even though doing so risks encouraging speculative behavior in the economy that Chinese leaders have been at pains to eliminate.
The country’s central bank cut three policy rates this week to help spur lending. In addition, The Wall Street Journal reported this week, the central government is considering issuing special treasury bonds worth roughly 1 trillion yuan, equivalent to $140 billion, to help fund new infrastructure—a tried-and-true tactic to stimulate growth that economists say is likely to yield diminishing returns while increasing debt.
Authorities are also considering looser rules to encourage people to buy more than one residence, despite repeated warnings by leaders in recent years that “houses are for living in, not for speculation.”
On Friday, Chinese Premier Li Qiang said in a State Council meeting that the government is studying a package of policy measures to promote sustained economic growth, state TV reported. “The external environment is becoming more complex and severe, and the slowdown in global trade and investment will directly affect the recovery process of our country’s economy,” Li said.
Economists say Beijing had little choice but to act, as more ordinary Chinese appear to be losing faith in the economy.
College students who are graduating this summer into a weak job market have been posting viral pictures online showing themselves throwing their degree certificates into garbage bins, or lying face down on the ground, to express their feelings of dejection.
If confidence isn’t restored, some analysts say, it could lock the economy in a downward spiral and render further monetary easing and other stimulus ineffective.
“The real barrier to a growth recovery is a lack of confidence,” wrote Ting Lu, chief China economist from Nomura in a note this week. He added that China’s situation is becoming increasingly similar to Japan in the 1990s, when weakened confidence after a real estate bust contributed to decades of weak growth and declining prices.
Nomura lowered its forecasts for gross-domestic-product growth in China to 5.1% and 3.9% in 2023 and 2024, respectively, from 5.5% and 4.2% previously.
Some investors have compared Beijing’s pivot to stimulus to its abrupt decision last year to lift its zero-Covid policy. Beijing had repeatedly said it wouldn’t abandon the policy, which included lockdowns and travel restrictions, even as other countries had relaxed their rules.
But Chinese leaders eventually decided the economic costs were too high, especially after protests against the policy broke out in some cities.
Economists from Morgan Stanley believe Beijing’s stimulus efforts will help China’s growth pick up again in the third quarter, and resume what it calls an “organic consumption recovery.” China’s rising dominance in the renewable-energy supply chain will help further boost growth, they added.
Others think Beijing will need to go further, with steps such as offering cash handouts to households.
“In order to restore confidence, the government needs to do more,” said Keyu Jin, an associate professor of economics at the London School of Economics and author of the book “The New China Playbook.”
“The size and the scale and efficiency of the stimulus has been lacking,” she added.
One challenge for Beijing is that it doesn’t have a lot of good options beyond throwing more money into big-ticket projects like bridges and subways, and promoting real-estate sales.
Regulatory crackdowns on China’s technology and education sectors in recent years have made many entrepreneurs wary about launching new investments. Many prospective home buyers fear it could take years before property prices rise again in a sustained way, due to an oversupply of vacant units. Some consumers are unwilling to burn cash in part because China has never developed a sufficient social safety net to make them more confident about spending.
In February, hundreds of senior citizens protested in the central city of Wuhan after the government cut back on medical insurance programs amid mounting debt pressures.
Zhao Zhao, a Beijing homemaker with two children, said her husband, who works at a state-owned company, hasn’t received a raise in the past three years, while education expenses for her children have kept rising. As a result, she is cautious about spending.
“The economy is not doing as well as people anticipated,” said Zhao. “I instinctively want to save more until things get better.”
Chu Ding, who has a restaurant in the central city of Wuhan, said she isn’t very optimistic about the future. Dine-in and takeaway orders at her restaurant picked up this February, but the recovery plateaued soon after, with daily turnover slightly less than before the pandemic.
Even with Covid restrictions now gone, “it takes time for the economy to recover, as well as business and consumer confidence,” she said.
As recently as a few months ago, economists were marking up their forecasts for growth this year. Chinese consumers, thrilled to be released from draconian Covid-19 lockdowns, were filling up restaurants and swarming domestic tourist sites.
The initial excitement proved to be short-lived. Retail sales growth slowed to 12.7% in May from a year earlier, from 18.4% in April. New orders at factories contracted in April and May.
An official gauge of consumer confidence, at 94.7 in March, is slightly better than its record low of 85.5 last November. But confidence is still depressed compared with where it was in March 2019, when it hit 124.1.
Deterred by uncertain economic conditions, more young people are holding off on having children. Last year, only 6.83 million couples in China married, the lowest since records began in 1986.
Much of the weak sentiment reflects the fact that many households and companies are deeply indebted, and need to repair their balance sheets before making new investments or spending freely.
Urban disposable income grew by around 8% each year between 2015 and 2019. It then slowed to around 6% between 2020 and 2022, with lower-income groups suffering the biggest slowdowns, according to research by Bank of China International.
“People are taking note that there is not only no additional new support, their benefits have been reduced,” said Houze Song, a research fellow at the Paulson Institute.
In addition, the perception that Chinese leaders are de-emphasizing high growth targets in pursuit of other priorities such as self-sufficiency and technological advances has dampened confidence and could alter people’s behavior for years to come, he added.