HONG KONG, Aug 15 (Reuters) – China’s July retail sales, industrial production, investment and other economic activity data did not meet expectations, prompting fears of a deeper and prolonged slowdown in growth. rising.
The end of China’s growth has been predicted incorrectly before. Is it different this time?
Activity data have been weaker than expected since the beginning of the second quarter, raising fears that China’s economy is nearing a tipping point as the economy slows.
It wouldn’t be the first time.
Alarm bells rang for growth during the global financial crisis of 2008-2009 and the capital outflow scare of 2015. China has achieved economic growth by taking measures such as boosting infrastructure investment with a shock wave and encouraging speculation in the real estate market.
But the infrastructure buildup has created huge debts and the property bubble has already burst, posing risks to financial stability.
Given that China’s debt-powered infrastructure and property investments have peaked and exports are slowing in line with the global economy, China has only one other source of demand to work on: household consumption. .
In that sense, the deceleration this time is different.
China’s recovery depends largely on its ability to convince households to spend more and save less, to the extent that consumer demand compensates for weaknesses in other parts of the economy.
Why do economists focus on household demand?
Unlike Western consumers, the Chinese were largely left to fend for themselves during the COVID-19 pandemic, and the retaliatory spending some economists expected after China’s economy reopened never happened.
But household consumption as a share of gross domestic product (GDP) was among the lowest in the world even before COVID-19, and economists say this could be a major factor in an economy overly dependent on debt-powered investment. He points out that this is an important structural imbalance.
Economists blamed weaker domestic demand on private-sector investment appetite and China’s deflation in July. A prolonged deflation could exacerbate the economic slowdown and exacerbate the debt problem.
The consumption-investment imbalance is worse than in Japan before the 1990s recession “lost decade.”
How bad can the slowdown be?
Following July’s economic activity data, some economists warned that China could struggle to reach its growth target of about 5% a year without further fiscal stimulus. there is
That’s a much higher rate of growth than many other major economies experience, but for a country that invests about 40% of its gross domestic product (GDP) each year (roughly twice the amount invested by the United States), Still a disappointing result.
Given the high level of local debt, there is also uncertainty about China’s willingness to implement a large fiscal stimulus.
The stress in the property market, which accounts for about a quarter of economic activity, has further fueled concerns about policymakers’ ability to stem a slowdown in growth.
Some economists have warned that investors will have to get used to significantly lower growth rates. A few of them even raise the possibility of Japan-like stagnation.
But given that youth unemployment is above 21% and deflationary pressures are squeezing profit margins, many consumers and small businesses are already feeling economic pain as severe as during the recession. Other economists say it’s possible.
Are interest rate cuts effective?
The People’s Bank of China surprised markets by cutting interest rates on Tuesday.
But economists say the cuts are too small to make any meaningful difference and warn their main role is to signal markets that authorities are ready to stimulate the economy.
Further cuts could also risk a yuan depreciation and capital outflows, which China wants to avoid.
What can help?
Economists want policies that increase household consumption as a share of GDP.
Options include government-funded consumer vouchers, deep tax cuts, driving faster wage growth, higher pensions, building social safety nets such as unemployment benefits, and better and more widely available public services. is included.
No such measures were presented at the recent Communist Party leadership meeting, but economists are eyeing a major party meeting in December for more drastic structural reforms.
Reported by Marius Zaharia.Editing: Robert Barthel
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