China is trying to rebuild confidence among businesses and consumers scarred by crackdowns on the private sector and harsh Covid restrictions that contributed to its ailing economy.
So far, the efforts have underwhelmed, as Beijing is loath to lean on the debt-fueled spending it resorted to in the past as the country’s debt-to-GDP nears 300%, and local governments are deeply indebted.
Confidence levels have been beaten up by a confluence of events in the past couple of years, including pandemic lockdowns that kept people stuck at home for weeks, a sharp drop in the property market that holds 70% of household wealth, and crackdowns on a range of companies.
“We are observing a run on confidence—both domestic and international,” says Zongyuan Zoe Liu, Maurice R. Greenberg fellow for China studies at the Council on Foreign Relations during a hearing on Monday at the U.S.-China Economic and Security Review Commission in Washington. Liu noted that China stopped publishing consumer confidence data since April but it had been headed downward in the prior year.
“The consumer in China is deeply not confident. There’s a popular saying right now in China: ‘If you don’t buy, I don’t buy, and the price will go down by 200 yuan next week.’ Policy is very deflationary,” Liu says.
While some services—like movie box office ticket sales or restaurant and bar sales—have seen a rebound as Covid restrictions were lifted last year, the next stage has to be spending on goods and investments by private companies—and that hasn’t happened yet, says Matthews Asia investment strategist Andy Rothman.
Part of the economic problems are self-made, with Chinese policy makers mishandling efforts to tackle socioeconomic problems like improving access to healthcare and education, and addressing income inequality, making it difficult for businesses to gauge what reforms could come next, Rothman tells Barron’s.
“They implemented [those policies] in a disastrous way so that it hurt the confidence of entrepreneurs, and small privately-owned businesses employ 90% of China and account for the majority of economic growth. That hurts household confidence,” Rothman says.
To revive confidence, Rothman says policy makers need to make a convincing case that they will step out of the way so entrepreneurs can do business without fearing efforts to solve socioeconomic problems will become obstacles to businesses. That will take time.
“We shouldn’t expect any dramatic moves by the government but rather more quiet statements and directions to local officials to get out of the way,” Rothman says, noting that as small businesses are able to make successful investments, momentum will build. “This is going to be a gradual process—not a switch the government can flip.”
Time isn’t on China’s side as concerns about longstanding structural issues related to debt combined with the difficulty in accessing economic data undermine confidence further.
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JPMorgan
economists now expect second-half economic growth of 4.3%, what they describe as “subpar” and on track to miss the government’s 5% target, with plenty of risk it could get worse as housing remains in recession. More aggressive actions aimed at directly supporting business and household demand is needed—and even then probably won’t boost this year’s growth, the economists caution.
The bigger concern is that the events of the past couple of years have shaken a general faith in China’s economic model and the implicit guarantee between the party and the people: Stay out of politics and focus on the economy and everything will get better, Nicholas Borst, director of China research for asset manager Seafarer Capital Partners, said at the hearing.
Few strategists and investors expect China to resort to the big-bang, debt-fueled stimulus seen after the global financial crisis. And while local governments were a major driver of the real estate market and served as an important channel to help the economy out of past downturns and facilitate national priorities like building a domestic chip industry, they are more constrained this time. As land sales dry up, their finances are deteriorating.
“They can’t play the same role so a key tool in the toolbox isn’t going to work as well as it did in the past,” Borst said during the hearing. However, he added that China’s economy isn’t collapsing, but is on track to slower growth in the range of 3% to 5%, versus the almost 8% it averaged in the decade before Covid.
But it’s going to be bumpy as policy makers rethink how they want to rebuild confidence in an economy that is shifting to a new and slower phase of growth as most of the drivers of its past growth—a growing labor force and debt—can’t be replicated.
Write to Reshma Kapadia at [email protected]
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