As the surge of enthusiasm over Beijing’s September economic stimulus effort has dissipated, the authorities have promised more. After a long litany of failures stretching back for years now, few have any confidence that whatever follows will do the job. Beijing may not even know what to do next. The smart betting is that China’s economy will continue to run at a sub-standard rate.
The September program was Beijing’s biggest effort yet to move China’s economy. But as pointed out in my October 6 discussion, Beijing Must Fell Like It Is Under Pressure, And It Most Definitely Is, the program had many inadequacies. After an initial enthusiasm markets also saw those inadequacies, and enthusiasm has given way to signs of disappointment. Lately, observes have begun to speculate that President Xi Jinping is less interested in the essential work to get the economy moving than he is about the embarrassment of financial failures. They point out that such a bias is clear in a September policy emphasis less on the economy directly and more on interest rates, monetary easing, and special help for finance.
Not all Beijing’s September efforts were, however, focused on finance and financial firms. The authorities did make gestures at reviving home buying and ridding the markets of surplus units. Lower mortgage rates and new ways for existing homeowners to reduce the burden of financing were included. But as the October 6 discussion pointed out, these efforts were hardly sufficient to offset the effects on household wealth from the 12% drop in real estate values since 2021 much less the string of failures among housing developers, such a Evergrande and County Garden, during this time, failures that rose into the equivalent of hundreds of billions of dollars.
What makes the disappointment likely to stick is that it follows a long series of policy mistakes by China’s once-widely-praised central planners. Many of those missteps actually created the problems that the planners are now trying to remedy. President Xi’s zero-Covid policies began the process of failure. This harsh policy extended the shutdowns associated with the pandemic for two years after the rest of the world had begun to re-open its economies. The shutdowns disrupted trade relations that were important to China’s economy and its businesses, and they undermined confidence among Chinese wage earners that they could count on a regular income. These insecurities linger to this day.
At the same time as zero-Covid was holding back China’s economy, Beijing in 2020-2021 decided that the country needed to shift away from real estate development as an engine of growth and toward higher-technology pursuits. Accordingly, after decades of promoting real estate development through all sorts of financial supports and cozy relations with local governments that at one time had raised such activity to nearly 45% of the economy, Beijing abruptly removed the support and did so without giving anyone involved time to adjust. Large developers who had become highly leveraged with debt to take advantage of past support, immediately began to fail. Starting with Evergrande in 2021, the pattern of failure has since spread across all real estate developers. Because Beijing for two years did little or nothing to mitigate the effects, these financial failures brought a collapse in home buying and the sharp decline in real estate values already noted. The failures also constrained Chinese finance so that it has been otherwise unable to support growth as well as it might have.
This record, depressing as it is, is not all. In 2023, the planners decided that they could replace China’s otherwise sputtering growth engine with an emphasis on what they considered critical industries, among them electric vehicles, artificial intelligence and other technology-oriented activities. Beijing accordingly invested heavily in these areas, using money that might have been better used to relieve the burdens on China’s consumers, associated businesses, and financial markets. Because China’s already weakened economy could not support the expanded output in these areas and Beijing’s stubborn intransigence in the face of complaints from western and Japanese trading partners made businesses in these countries unwilling to buy from the sudden rise in China’s high technology capacities, the recently built capacity could not find buyers.
With this record in mind, it is hard for anyone to have any confidence in Beijing’s future efforts to answer the economy’s needs or those of the financial sector for that matter. Probabilities, it would seem, favor an outlook of sub-standard economic growth in China for the foreseeable future.