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The writer is president of Queens College, Cambridge and advisor to Allianz and Gramercy
Economists and Wall Street analysts are dismayed by China’s economic performance, which they hope may prompt the government to undertake a stimulus effort similar to that seen in 2008.
This, in turn, would reinvigorate domestic growth and restore China as a major engine of global expansion. However, the more likely scenario is continued weak growth. The primary policy question now is how soon the government will move away from stimulus measures to a rapid fundamental change in its growth strategy.
China’s weak economic performance so far in 2023 can be attributed to two key factors: a weak recovery following the easing of strict zero-Covid restrictions, and more persistent and structural growth challenges. The latter is the result of an economic strategy that has historically relied heavily on real estate, high local debt, inefficient state-owned enterprises, low-end manufacturing, and domestic consumer internet platforms.
The problem is exacerbated by a number of factors, including regulatory overreach, ongoing geopolitical tensions, and low foreign direct investment inflows. There are also concerns about a possible Japan-style deflationary trap, especially in the wake of declining consumer and producer prices. Some foreign investors have asked whether “China is worth investing in”.
Chinese authorities have announced a series of small monetary, fiscal and regulatory measures in recent weeks to boost the economy and markets. These measures have so far been rightly regarded as piecemeal and lacking conviction. Yet many still believe that they will eventually coalesce into an influential critical group. However, there are problems with this approach as well.
China not only faces development challenges, but also significant financial issues, including areas of high indebtedness that can easily turn into systemic risks. This limits the scope for old-fashioned incentives. Increased vulnerability, especially in the struggling asset sector, makes households more cautious in spending, reducing its potential as a growth driver. Concerns about youth unemployment remain, and they haven’t been helped by the government’s decision to stop releasing the relevant data.
The approach to external trade and investment is equally problematic. There is a growing realization that the economic and financial separation between China and the US is likely to continue. This could reduce the contribution of exports to growth, constrain imports of critical industrial inputs, weaken foreign direct investment and make portfolio investors even more parsimonious.
The will of the officers is also under question. Careful analysis of leadership statements points to concern that a heavy reliance on traditional stimulus measures will jeopardize China’s ability to avoid the common growth trap of getting stuck in the middle-income levels. This threat has already hindered many developing countries in their quest to join the ranks of advanced economies. Large scale incentives will also increase the risk of corruption.
It is likely that officials will offer only small incentives while trying to better communicate their intention to accelerate transformation in new growth sectors (such as high value-added manufacturing, green energy, healthcare, artificial intelligence, supercomputing and life sciences). Will continue to tinker with the measures. , This modified growth model takes time and involves creative destruction, especially in the short term. In addition, the authorities would need to consider more forceful debt restructuring measures, which would, to begin with, also constrain growth.
It is time for markets to recognize that China is not returning to its old economic and financial strategy, and is unlikely to return as a powerful driver of global economic growth in the near future. Economic performance is likely to remain weak in the remainder of 2023 and the first half of 2024.
Looking beyond this period, the outlook is also not reassuring. The challenging process of reorienting the Chinese economy in the face of ongoing geopolitical tensions and the complexity of building an alternative international order poses significant obstacles. Authorities will also need to overcome their now heavy inclination towards centralization and, instead, enable the emergence of powerful private sector engines of growth, but not micromanagement. Despite what many people will keep telling you, it is no longer a certainty that China will become the world’s largest economy.