When China abruptly ended its lockdown and other Covid precautions last December, officials in Beijing and many investors held out hope that the economy would revive.
It hasn’t worked that way.
Investment in China has stabilized this spring after a flurry of activity in late winter. Exports are declining. Fewer and fewer new housing projects are being launched. Prices are falling. One in five youth is unemployed.
China has tried several reforms over the years when its economy flagged, such as heavy borrowing to pay for roads and rail lines. And it spent huge sums on testing and quarantining during the pandemic. Additional stimulus spending now with borrowed money will spur activity but poses a difficult choice for policymakers already worried about accumulated debt.
“The authorities risk being behind the curve in stimulating the economy, but there is no quick fix,” said Lewis Lu, an economist specializing in China at the Singapore office of Oxford Economics.
China needed to repair its economy after shutting itself off from the world for nearly three years to fight Covid, a decision that prompted many companies to shift their supply chains elsewhere. Chinese leader Xi Jinping on Monday asked United States Secretary of State Antony J. Blinken, in an effort by the two countries to ease diplomatic tensions and pave the way for high-level economic talks in the coming weeks. Such discussion may slow the recent proliferation of sanctions and countermeasures.
China’s stalled economic recovery has seen strong growth in only a few categories of spending, such as travel and restaurant meals. And they have risen compared to extremely low levels in spring 2022, when a two-month lockdown in Shanghai disrupted economic activity across large areas of central China.
The economy has been particularly weak in recent weeks.
Yin Yanlin, former deputy director of the Chinese Communist Party’s top economic policy-making commission, said, “From April to May, the economy has undergone significant unexpected changes, even leading some to believe that the initial judgment may be overly optimistic.” Can.” , said in a speech at an academic conference on Saturday.
Chinese government officials are indicating that an economic stimulus plan may be imminent.
The country’s State Council, or cabinet, said one after another, “In response to changes in the economic situation, more vigorous measures should be taken to accelerate the pace of development, optimize the economic structure, and promote the economy’s sustained recovery. ” The meeting was held on Friday under the leadership of the country’s new Prime Minister Li Qiang.
China’s economic weakness holds both an advantage and a threat to the global economy. Consumer and producer prices have declined in China for the past four months, which has put the brakes on inflation in the West by reducing the cost of imports from China.
But weak demand in China could exacerbate a global slowdown. Europe is already in a mild recession earlier this year. Rapid interest rate hikes in the United States have prompted some investors to bet on a recession there later this year as well.
Beijing has already taken some steps to revive economic growth. Tax breaks are being introduced for small businesses. Interest rates on bank deposits have been reduced to encourage households to spend more rather than save their money. The latest government measure is expected on Tuesday, when the state-controlled banking system is likely to slightly lower its benchmark interest rates for corporate loans and home mortgages.
But many economists inside and outside China worry about the effectiveness of the new measures.
Consumers are hoarding cash and investors are shying away from investing in Chinese companies. Private investment has actually declined so far this year compared to 2022. housing is in crunch, developers are borrowing more to pay off existing loans and to complete existing projects, even though China is already suffering from an oversupply of homes.
China’s housing market is at the heart of its troubles. Construction accounts for a quarter of China’s economic output. But prospective homeowners have been put off as the developers have defaulted on their loans and failed to make advance payments to apartment buyers.
Compared to the same months last year, housing construction declined by about 23 percent in the first five months of the year. This shows that the real estate sector will witness further downfall in the coming months.
Chen Liqian, a 27-year-old marketer in Beijing, started looking for an apartment with her boyfriend in 2021 after five years of dating. But after marriage they decided to live in a rented apartment.
“Housing prices are falling across the country, and the economy is in bad shape – there are too many destabilizing elements,” Ms Chen said.
Two-thirds of colleagues in Ms Chen’s online tutoring company in her department were laid off after China cracked down on the for-profit private education industry in 2021. He also had a friend who later could not pay the mortgage. Losing jobs in tech, and losing homes in foreclosure.
The caution of middle-class families like Ms. Chen’s may pose the biggest dilemma for policymakers as they search for an effective formula for a second round of economic stimulus.
“You can throw money at people, but if they are not convinced, they will not spend,” said Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, a French bank.
Households are not the only ones struggling to pay their debt – local governments are too, which has limited their ability to ramp up infrastructure spending.
The government is wary of starting another credit binge after the collapse of China’s stock market during the global financial collapse in 2009 and in 2016.
Although a sluggish real estate sector has hurt demand inside China, exports have been flat this year and actually declined in May. The weakness of China’s normally strong 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 overseas markets.
More exports help create jobs and can offset an otherwise sluggish domestic economy. But it is unclear how much China will be able to rely on exports for 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 industrial goods, making it more expensive for American companies to buy from China. Then President Biden last year persuaded Congress to authorize broad subsidies for American production in categories such as electric cars and solar panels. China’s exports to the United States were down 18.2 percent last month compared to May last year.
As China contemplates how to reinvigorate the economy, it must contend with a lack of confidence among consumers.
Charles Wang runs a small travel company with eight employees in Zhangjiakou, northern China. His business has almost fully recovered after the pandemic, but he has no plans to invest in expansion.
“Our economy is really going down, and not everyone has the time and willingness to spend that much,” Mr. Wang said. “It’s because people just don’t want to spend the money – everyone’s afraid to reapply, even the rich.”
li yu Contributed to research.