China should not wait to stimulate its economy
Summary
- It is heading into a trade war
Journalists love a telling quote—so much so that they will sometimes seize hold of a telling misquote. Zhou Enlai, who was China’s first Communist prime minister, was once asked what he thought of the French revolution. “Too early to say," he replied. His priceless answer was based on a misunderstanding: he was referring to the student unrest in Paris in 1968, only four years earlier. But his words helped cement the reputation of China’s leaders for farsightedness.
This long-termism may be to blame for China’s unhurried response to its urgent economic woes. Its property market, which peaked in 2021, is still fragile. Consumer confidence, shattered by the covid-19 lockdowns in 2022, has never recovered. The consequences include lacklustre spending, dwindling fiscal revenues and deflationary pressure. Figures released on November 9th showed factory-gate prices falling, year-on-year, for the 25th month in a row.
In September China’s leaders acknowledged these “new" problems and promised a more forceful response. Hopes rose for a bold fiscal stimulus that would provide handouts to consumers and mobilise more public money to revive interest in property. But a flurry of subsequent press conferences—from the planning agency, the finance ministry and the housing ministry—have offered little of substance.
In a final disappointment, a meeting of senior legislators between November 4th and 8th also failed to spell out a new stimulus package. What will China do to respond to inadequate demand, an ailing property market and persistent deflation? It is, apparently, too early to say.
The legislators did unveil a plan to refinance the implicit debts of local governments. The debt swap will alleviate financial risks and reduce borrowing costs. But the money expected to be saved in the next five years will amount to less than 0.1% of GDP over that period. That is far too little to get the economy back on track.
China’s leaders may believe there is already enough other stimulus working its way through the economy to help GDP meet the official growth target for this year of “around" 5%. In July, for example, they expanded a scheme to encourage consumers to trade in old cars and appliances for new ones. Property sales also picked up in recent weeks in China’s big cities, after regulators cut mortgage costs and reduced down-payment ratios for second homes. Nomura, a bank, this week raised its growth forecast for 2024 to 4.8%.
China’s leaders may also be biding their time. In keeping with their reputation for farsightedness, they may be keeping their powder dry until they know how much damage Donald Trump’s second presidential term will inflict on their country’s economy. The 47th president has threatened to slap tariffs of 60% on Chinese goods as an opening move—and to raise them higher if he chooses.
But this watchful waiting would be a mistake for China. Greater fiscal stimulus today does not preclude even more stimulus later if necessary. The country’s sovereign-bond yields are historically low, suggesting ample demand for the government’s paper. An onslaught from America would be likely to push them lower still. Whatever fiscal limits apply in China, they are still nowhere near biting.
China would also be in a stronger position to withstand American tariffs next year if the government successfully reflated the economy first. A higher rate of inflation would, for example, give China’s central bank more room to respond to further setbacks by lowering real interest rates.
By the same token, China will be in a weaker position to navigate a second trade war if it allows deflation to become further entrenched before the shooting starts. Falling prices would increase the country’s real burden of existing debts. They may also lead to a round of wage cuts by firms, which would only compound the problem.
Aux armes!
China may be keen to husband its fiscal ammunition. But China’s true resources are the labour and capital at its disposal. Every month they remain underemployed is a wasted month—time the economy will never get back. China is heading into a trade war. Leaders do not prepare for war by counting their money, but by mobilising their manpower.
Subscribers to The Economist can sign up to our newOpinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence.
© 2024, The Economist Newspaper Ltd. All rights reserved. From The Economist, published under licence. The original content can be found on www.economist.com
