Why Struggling China Has Hit the Panic Button

BY Szu Ping Chan

It’s been dubbed Beijing’s “do whatever it takes” moment.

In a surprise move on Monday, the country’s ruling Communist party vowed to ramp up support for China’s ailing economy.

With echoes of Mario Draghi’s bid to save the euro in 2012, leaders in Beijing changed their so-called stance on interest rates from “prudent” to “moderately loose”.

The change may seem benign and technical, but it is one that demonstrates how alarm bells are ringing across the Chinese Communist Party.

The shift in wording was the first tweak since the financial crisis in 2010 and comes ahead of this week’s China Economic Work Conference (CEWC), an annual meeting where leading policymakers set key economic objectives for the coming year.

But while leaders of the world’s second-largest economy may wish to channel the former European Central Bank chief, analysts warned that unlike a decade ago, China’s vast debt pile and weak property sector means this time around there are no bazookas to stimulate growth.

French banking giant Societe Generale described the change as a “read my lips moment” designed to show that China’s central bank means business. Stock markets jumped in response.

As part of the announcement, leaders vowed to adopt a “more proactive” stance and provide “extraordinary” support when it comes to tax and spending, while also implementing policies to “stabilise housing and the stock market”.

The politburo also pledged “to greatly boost consumption”, which is arguably China’s biggest post-lockdown challenge.

The economy is currently in the grip of a slow-motion crisis and consumer spending remains weak, with inflation rising by just 0.2pc in November, according to the latest figures.

A warning earlier this month from prominent Chinese economist Gao Shanwen went viral after he warned that the country was being dragged down by frugal and feckless youth who can’t find jobs, and as a result are refusing to spend money.

“The younger a province’s population is, the slower its consumption growth has been,” he warned at an investor conference in Shenzhen.

Lockdowns had created a society “full of vibrant old people, lifeless young people and despairing middle-aged people”, he warned, with no end in sight for the country’s misery.

Youth unemployment currently stands at more than 17pc in China, which is more than triple the national average.

That is one key issue weighing down the economy, which is in increasing danger of missing this year’s 5pc growth target. And while next year’s goal will not be revealed until the early months of 2025, the International Monetary Fund warns that the country is on a path of slower growth that will see its economy slow to around 3.3pc by 2029, down from 5.2pc in 2023.

Sonja Laud, chief investment officer at Legal & General Investment Management (LGIM), warns that China is already in the midst of a “balance sheet recession” triggered by a property crisis that used to drive a quarter of all economic output.

She adds that unlike 2008, China cannot simply unleash a spending spree to solve its problems.

“It’s very clear that China is facing a very difficult domestic situation,” she says. “We’ve talked at length about the balance sheet recession, the fact that you can’t really stimulate away the excess in real estate that has been built over decades, and as such, it is a lengthy process to get through this in order to really get to the bottom and a more stable footing for the economy.

“The consumer cannot overcompensate for the weakness that we are now seeing unfold – in particular in the real estate space – which has been for a long period of time, one of the largest contributors to Chinese growth.”

Donald Trump has threatened to implement tariffs of up to 60pc on Chinese goods, prompting a rush in shipments from East to West ahead of the US president-elect’s return to the White House.

Laud says she believes China’s latest proclamation was triggered by the threat of a new trade war. “They’re finding themselves not in a very preferable situation,” she says. “And this is why you have seen this announcement, probably as a demonstration that they’re fully aware of both the threat, but will do what it takes in a way, to help their domestic economy.”

Kelvin Lam at Pantheon Macroeconomics says he believes the exact amount of stimulus depends on what the US does next year.

“The Chinese authorities are clearly waiting for what happens in the US before they dish out their stimulus policy,” he says. “They’re looking at what Trump has been saying and what he is likely to do, and therefore building up their arsenal to counteract the possible protectionist measures issued by the Trump administration.”

Julian Evans-Pritchard at Capital Economics agrees that anyone hoping for a “big bang” financial stimulus will be disappointed.

“We do expect the People’s Bank of China to step up the pace of rate cuts next year, and the latest tweak in language suggests they could do slightly more than the 0.4 percentage points we are currently forecasting,” he says. “But it is unlikely that they will cut rates anywhere near as aggressively as they did during the global financial crisis.”

Laud at LGIM adds that China’s strength in manufacturing will do little to stimulate demand: “We’re seeing a lot of investment in electric vehicles and future technologies. But it is that consumption piece that’s missing that would allow to rebalance the economy.

“The reason why we are not too positive on this is simply because there is no way [China] can stimulate its way out. So they will need to make any stimulus far more targeted in order to address what might be the impact from tariffs while keeping the economy on a stronger footing.”

Lam at Pantheon warns that the crisis in consumer confidence will continue for as long as its property woes linger. “Around 70pc of Chinese families’ wealth is tied to housing,” he says. “So it is difficult to see a material increase in domestic demand unless these change drastically. And the property market is likely to be in doldrums for another year or so.”

He also warns that Western-style Covid rescue cheques simply do not exist in the same way in China.

“What we might expect in about 12 months or 24 months is more on structural reforms that reduce the social security burden on individuals so that they can spend some of their savings instead of handouts of, say, £1,000,” says Lam. “They don’t have the money to do that anyway.”

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VIA: The Telegraph