CHINESE OFFICIALS SPLIT ON ECONOMIC STRATEGY

China’s economic crisis has emboldened reformers who argue for structural change to the country’s economy, challenging other officials who contend that stimulus spending will put China’s productivity back on track, Reuters reported.

The argument is forcing policymakers to decide between quick steps to relieve the immediate problem or make more disruptive, longer-term reforms that have been ignored for too long.

Government leaders had promised “bold measures” to stimulate the country’s faltering economy. However, aside from several rate cuts by the central bank and a few regulatory reforms, little has been done.

Meanwhile, millions are jobless, foreign investors have fled, and the yuan has tanked, Reuters said. China’s real estate crisis lingers on, the workforce is aging, a robust consumer economy has never materialized, and Beijing continually imposes, revises and withdraws regulations, all amid growing geopolitical strife.

Those calling for strong stimulus action point to infrastructure projects to create jobs and boost GDP, a strategy that China has relied on for decades.

“We need stronger stimulus policies and an overall plan, a package of macroeconomic policy measures,” economist Yu Yongding, an advisor to China’s central bank, said in a Reuters interview.

“China should issue more government bonds to finance infrastructure investment, including more investment in public facilities such as hospitals and old people’s homes,” he added. “China should not be afraid of increasing its budget deficit-to-GDP ratio and government bonds-to-GDP ratio.” 

He noted that the national government’s debt is just 21 percent of GDP, much lower than many other countries.

Reformers point that China’s total debt-to-GDP ratio is almost triple the GDP when consumer and local governments’ debts are factored in. Infrastructure spending worsens an already serious deficit and relying on public spending to grow GDP is a worn-out tactic, they say.

Instead, they urge deep structural changes such as relaxing the system of residence permits, which would boost consumption; making it easier for foreign firms to enter and work in China, even if that weakens state-owned companies; untangling regulations; and reducing the government’s role in the economy.

“The economy is unlikely to pick up as long as private firms lack the confidence to invest,” economist Yi Xianrong at Qingdao University said to Reuters.

Reforms should be created to tap the spending power of workers who have migrated to cities, central bank advisor Liu Shijin said to Reuters, which noted that Yi Gang, former head of the central bank, has also made that argument.

The old growth engines of property development, manufacturing for export, and building infrastructure are played out, Liu insists.

“If we continue to focus on macroeconomic policies to stabilize growth, the side effects will increase,” he said at an August conference. “More importantly, the opportunity for structural reform will be missed again. 

“Structural reforms with expansionary effects can also have immediate effects” just as short-term stimulus does, he pointed out.

“Policy stimulus is not effective and it’s just a placebo,” one government economist told Reuters.

The arguments are sharpening ahead of December’s annual Central Economic Work Conference where top government leaders set economic policy.

The International Monetary Fund is planning to tell China to find ways to increase consumer spending, slow the rate at which local governments are piling up debt, and mop up its real estate mess, IMF managing director Kristalina Georgieva said to Reuters last week.

China needs both stimulus and reform, Rob Subbaraman, Nomura’s chief economist, said to Reuters, but “it is where it is now because historically it’s relied more on policy stimulus than on the harder structural reforms,” he said.

Stimulus could jolt the economy in the near term, while structural reforms—though painful and disruptive—would produce broader economic growth over time, creating a more stable economy, he added.

TRENDPOST: The choice of short-term stimulus or long-term structural reform is false. The economy needs both, not just one or the other.

However, convincing policy makers—especially president Xi Jinping—to embrace both will be difficult.

Xi has been leery of major economic interventions, a stance that has let China’s economy drift since COVID restrictions were lifted.

Also, some top officials are arguing that strong intervention is unwise while the nation’s debt is triple its GDP; some have called the current debt a “crisis.”

The economic work conference in December will set policy for the coming year. With Xi having cemented his presidency for life and surrounding himself with loyalists, odds are that no startling changes to policy will emerge.

However, if China’s economy continues to languish through this year’s fourth quarter, that could give reformers a larger voice in determining what lies ahead. 

CHINA’S REAL ESTATE CRISIS DEEPENS

On 25 September, share prices for major Chinese real estate developers shed an average of 7.1 percent, the most so far this year amid fears that property giant Evergrande may liquidate, according to Bloomberg Intelligence.

Evergrande abruptly canceled meetings with creditors and said it needs to review its restructuring plan. Its stock price then plunged 22 percent.

For years, China’s property developers overborrowed and overbuilt. When home sales slumped during the COVID War, developers had no cash flow to service their debts. Many defaulted on foreign loans and have staggered along with government aid.

China Oceanwide Holdings said on Monday it expects to liquidate. Country Garden Holdings, the last developer to show serious weakness, may default on its loans at any time, analysts warned.

Last week, Moody’s Investors Service began reviewing two of China’s few remaining solvent developers for a possible credit downgrade due to serious concerns over their future.

China Aoyuan Group, another key developer, saw its market capitalization plummet 72 percent on 25 September. It was the first day the stock had traded after an 18-month hiatus while the company worked to right its finances.

The stock’s dismal performance indicates that not only has the company not regained investors’ trust but also that the entire property sector is no better off than two years ago when its crisis made headlines.

“This change in debt restructuring plan may further cloud the future of [Evergrande],” Willer Chen, senior analyst at Forsyth Barr Asia, told Bloomberg. “For the remaining surviving developers, the market is focusing more on their property sales recovery and policy support,” he added.

The spate of bad news comes as the eight-day Golden Week holiday begins on 29 September. Traditionally, Golden Week is one of the busiest periods for home-buying. Developers have held high hopes for a sales rebound to lift them out of trouble.

Meanwhile, officials are working to prevent the property sector’s woes from sinking commercial banks. It already has injured several manufacturing industries related to construction, including steel and concrete.

We have tracked China’s continuing real estate disaster in articles such as:

• “China’s Real Estate Market Teeters on Evergrande’s Debt” (21 Sep 2021)
• “China’s Real Estate Troubles Ripple Across Emerging Markets” (26 Oct 2021)
• “China’s Real Estate Crisis Grows” (9 Nov 2021)
• “China May Break Up Troubled Real Estate Giant” (1 Feb 2022)
• “Ánother Chinese Property Developer Goes Bust” (15 Aug 2023)

TRENDPOST: Beijing has two bad choices to resolve the real estate crisis.

One is massive intervention.

This would include funding developers so they can complete houses that homebuyers have already begun making payments on. That influx of cash that would let developers meet their obligations to consumers and pay bills. Next, government officials could see which developers appear strongest and force them to take over weaker rivals. Some companies would dissolve in liquidation.

The government also can forgive some or all of developers’ debts held by state-owned banks.

The second option is to let developers fail, then the government can step in and find a way to pick up the pieces.

So far, Beijing has chosen a third option: to let the crisis stumble along unresolved, destroying consumers’ confidence in the housing market and allowing ailing companies to suck resources out of the economy.