China finds itself in its longest deflationary run since the 2008 Global Financial Crisis.
China managed to narrowly surpass its economic growth target of 5% last year, one of its lowest benchmarks in decades. However, as analysts peer into the future, they anticipate formidable challenges for the Chinese economy in the Year of the Dragon.
Amidst a backdrop of a crisis-ridden property market, subdued export earnings, and government crackdowns on private industry, international investors are withdrawing from Chinese stocks at record rates.
Economists widely agree that Beijing must implement measures to stimulate greater domestic consumption, given the current decline in business sentiment. However, expectations are tempered due to Beijing’s long-standing aversion to large-scale social spending initiatives.
Despite the prevailing challenges, some analysts hold a glimmer of optimism, seeing opportunities beyond the current difficulties. China finds itself in its longest deflationary run since the 2008 Global Financial Crisis. Consumer prices have steadily declined, with January marking the fourth consecutive month of decreases, signalling a trend likely to extend into 2024.
Kevin P Gallagher, Director of the Boston University Global Development Policy Centre, noted that China did not experience the anticipated economic boost post the removal of Covid restrictions in late 2022. Authorities now grapple with the looming threat of falling prices, which risk triggering a self-reinforcing cycle if households and businesses delay purchases in hopes of further price drops.
Deflationary pressures also pose challenges for debtors as the real cost of borrowed money rises. China’s debt-to-GDP ratio, including local government liabilities, reached 110% in 2022, presenting a growing headache for policymakers.
In response, authorities have intensified support measures to counter falling prices, including lowering mortgage rates and reducing cash reserve requirements for banks to encourage increased lending.
Much of China’s deflationary challenges stem from its beleaguered real estate sector, which contributes significantly to GDP. Local governments, in the aftermath of the 2008 Global Financial Crisis, encouraged a debt-fueled construction boom to stimulate growth. However, oversupply now outpaces demand, leading to declining new home sales and cautious consumer spending.
Chinese households have become more conservative with their spending, particularly on property, as a weak social safety net prompts families to prioritize saving for emergencies. In 2022, household consumption accounted for just 38% of China’s GDP, compared to 68% in the United States.
Addressing this imbalance is crucial, as gross national savings exceeded 40% in 2023, more than double the US level. Sheana Yue, a China economist at Capital Economics, emphasized the need to encourage spending by rebalancing the economy away from excessive investment towards consumption.
Beijing’s heavy investment in infrastructure, including housing, roads, bridges, and train lines, has led to years of over-investment and spare capacity. However, this capital-intensive infrastructure model faces limitations, especially with already low-interest rates. Beijing must now prioritize stimulating consumption to ensure high and stable growth.
Analysts anticipate that China’s rubber-stamp parliament, the National People’s Congress, will set an annual growth target of around 5% when it convenes in March. While some economists advocate for stimulating growth through household transfers, others expect investment-driven growth to persist, citing Marxist ideology’s focus on industrial production.
Victor Shih, an expert on the Chinese economy at the University of California, San Diego, believes that comprehensive social assistance would be financially burdensome, particularly in a deflationary context. Shih suggests that raising wages could boost household consumption, but this risks undermining Chinese exports, a significant source of output.
Beijing’s strategic priorities, including investing in strategic industries like AI and advanced computer chips, aim to reduce reliance on foreign technology and support long-term geopolitical ambitions. By focusing on economic self-sufficiency and job creation, Beijing hopes to navigate through economic transformation slowly but steadily.
Despite challenges, China’s economic growth trajectory remains robust, tallying at 5.2% last year. While the Year of the Dragon may bring its share of uncertainties, it also presents an opportunity for China to bolster domestic consumption and navigate through economic reforms with resilience and determination.