China is trying to restore trust among businesses and consumers that has been bruised by crackdowns on the private sector and stringent COVID-19 restrictions that have contributed to its economic downturn.
With the country’s debt-to-GDP ratio approaching 300% and local governments heavily indebted, the Chinese government has in the past been reluctant to rely on debt-powered spending, so its efforts so far have been hampered. It’s not going well.
Over the past few years, a combination of pandemic lockdowns that have kept people at home for weeks, a slump in the real estate market, which accounts for 70% of household wealth, and various housing crackdowns, have caused confidence levels to plummet. of enterprise.
Zhongyuan Zoe Liu, a Maurice R. Greenberg China Studies Fellow at the Council on Foreign Relations, said at a hearing of the U.S.-China Economic and Security Review Commission on Monday, “both domestically and internationally. , we are observing a erosion of confidence.” Washington. Liu said China stopped publishing consumer confidence data in April, but that it had been trending downward in the previous year.
“Chinese consumers are deeply unsure. There is a popular saying in China right now: ‘If you don’t buy, I won’t buy, next week the price will drop by 200 yuan.’ The policy is very deflationary,” Liu said.
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Some services, such as movie box office ticket sales and restaurant and bar sales, have recovered since COVID-19 restrictions were lifted last year, but the next phase will be spending on goods and investments by private companies. Yes, and that hasn’t happened yet, says Andy Rothman, Asia investment strategist at Matthews.
Some of the economic problems are self-inflicted, with China’s policy makers mishandling socioeconomic issues such as improving access to health care and education and tackling income inequality, leaving companies wondering what to do next. That makes it difficult to see if reforms will happen, Mr. Rothman said. Barons.
“They implemented [those policies] The results have been disastrous enough to undermine entrepreneurial confidence, with small privately-owned enterprises accounting for 90% of employment and much of China’s economic growth. It hurts the confidence of households,” says Rothman.
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In order to restore trust, Rothman argues that policy makers will not get in the way of entrepreneurs doing business without fear that efforts to solve socioeconomic problems will hinder their businesses. said that it is necessary to make certain claims. It takes time.
“We shouldn’t expect dramatic moves by the government, but rather quiet statements and instructions to stop interfering with local authorities,” Rothman said, adding that momentum is building as small businesses succeed in investing. pointed out that it would increase “This will be a gradual process. The government cannot flip the switch.”
Concerns about long-standing structural problems related to debt, coupled with the difficulty of accessing economic data, have further eroded confidence in China, and time is not on China’s side.
Thank you JP Morgan
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Economists now forecast a “below average” economic growth of 4.3% in the second half, falling short of the government’s 5% target, but there is ample risk of further deterioration as the housing slump continues. . Economists warn that more aggressive action aimed at directly supporting business and household demand is needed, but that probably won’t boost growth this year.
A greater concern is that the events of the past few years have shaken public confidence in China’s economic model and the implicit guarantees between the Party and the people: “If you leave politics and focus on the economy, everything will be fine.” It will get better,” said Nicholas Borst, China research director at investment manager Seafarer Capital Partners at the hearing.
Few strategists or investors expect China to resort to the kind of debt-powered Big Bang stimulus seen after the global financial crisis. Local governments have also been a major driver of the real estate market and have served as important channels to rescue the economy from past stagnation and advance national priorities such as building a domestic chip industry. more constrained. Land sales have dried up and finances are deteriorating.
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“The key tools in the toolbox won’t work as well as they used to because they can’t do the same job,” Borst said at the hearing. But he added that while China’s economy hasn’t collapsed, it’s slowing to a range of 3% to 5%, compared with an average growth rate of about 8% in the decade before the pandemic. Ta.
However, most of the growth in the labor force and debt that has driven economic growth so far has not been achieved, leaving policymakers to question how to rebuild confidence in an economy that is moving into a new, slower growth phase. The situation is going to get tougher as people are rethinking. Duplicated.
Email Reshma Kapadia at reshma.kapadia@barrons.com.