Great Wall of worry
China must address its faltering economy with much more fiscal stimulus.
Published March 14 2024
With China's 2024 National People’s Congress concluding earlier this week, it's a good time to reflect on the state of the world’s second largest economy. Premier Li Qiang’s opening speech was particularly significant as it offered clues to the government’s plan for fiscal and monetary policy. To our minds, it created more questions than answers.
Li set a 2024 GDP growth target of “around” 5%—the same as 2023—but he admitted the economy faces a number of headwinds, most concerning being the real estate slump, large debt overhang, subdued consumer confidence and elevated youth unemployment.
Our real-time response to the speech to that point was, “so far so good.” He had diagnosed the patient correctly. However, it soon became clear the treatment plan is insufficient. In previous economic downturns, China’s go-to response was expansionary fiscal policy—best practices for alleviating a faltering economy. But government spending—deficit as share of GDP—declined in 2023, and its issuance of 1 trillion yuan’s worth of "ultra-long-term special treasury bonds" falls short. The country needs countercyclical medicine. Instead, Li said citizens should expect belt tightening and austerity
At the heart of the problem is that the Chinese consumer is overleveraged, scared by the zero Covid policy, battered by plunging property prices and stock markets, and aware of the risks of the subdued labor market. We think their propensity to borrow their way out of the slump is low. Simply put, growth this year will be held back by weak domestic demand.
Exacerbating the situation is that the People’s Bank of China is all but tapped out. Its steady reduction of rates since 2019 has not been as aggressive as it should, and its recent 50 basis-point cut in bank reserve ratio requirements falls short.
A skeptic might say the totality of the government’s response could be by design, sacrificing today to save the future that would double down on the green industry, such as rare earth minerals, EVs, high-end electronics and the like. More likely is that top policymakers don’t believe the economy is on the brink, or lack the political will to acknowledge how much stimulus it truly needs. There’s still time, but the country that invented gun powder may very well need to shoot the proverbial fiscal bazooka to right the economy.