What are the reasons behind China’s economic slowdown and could it deteriorate further?

China’s Economic Slowdown in Focus as Major Developer Faces Trouble

China’s economy is experiencing a slowdown, with policymakers attempting to rectify a downturn in the property market. Emphasis is being placed on the struggles faced by significant developer, Country Garden. As the world’s second-largest economy, concerns are growing over whether China is nearing a financial crunch point.

Reasons Behind China’s Economic Slowdown

Contrary to Western consumers, Chinese citizens were predominantly left to fend for themselves during the COVID-19 pandemic. The anticipated post-reopening spending spree by economists never occurred. Furthermore, demand for Chinese exports is dwindling as major trading partners grapple with increasing living costs. With 70% of Chinese household wealth tied up in real estate, the significant slowdown in the sector is having a ripple effect on other areas of the economy.

Previous Economic Concerns and Current Situation

During the global financial crisis in 2008-09 and a capital outflow scare in 2015, China managed to restore confidence through a boost in infrastructure investment and by encouraging property market speculation. However, these infrastructure upgrades have led to excessive debt, and the property bubble has now burst, posing risks to financial stability. China’s debt-fuelled investment in infrastructure and property has peaked, with exports slowing down in line with the global economy. The only other source of demand to manipulate is household consumption, making this slowdown distinctive.

Impact of Low Household Spending

Before COVID, household consumption was among the lowest in the world as a percentage of GDP. Economists have identified this as a key structural imbalance in an economy that relies heavily on debt-fueled investment. Weak domestic demand is blamed for subdued investment appetite in the private sector and China’s slide into deflation in July. If it persists, deflation could exacerbate the economic slowdown and deepen debt problems.

Potential Consequences of China’s Economic Slowdown

Some economists suggest that China may struggle to meet its economic growth target of about 5% for 2023 without more government spending. While 5% is still a significantly higher growth rate than many other major economies will achieve, it’s a disappointing figure for a country that invests roughly 40% of its GDP every year – about twice as much as the United States.

Government’s Options to Boost the Economy

Economists suggest several measures to boost the household consumption share of GDP. These include government-funded consumer vouchers, significant tax cuts, encouraging faster wage growth, building a social safety net with higher pensions, unemployment benefits, and better, and more widely available, public services. Economists are looking forward to a key party conference in December for more profound structural reforms.

Can Interest Rate Cuts Help?

Major Chinese banks have cut interest rates on a range of yuan deposits to alleviate pressure on their profit margins and provide themselves room to reduce lending costs for borrowers. Policymakers hope lower rates would boost consumption, but economists warn the accompanying deposit rate cuts result in a transfer of funds from savers to borrowers. Transfers of resources from the government sector to households would make a more meaningful long-term impact.

In conclusion, China’s economic slowdown is a complex issue. Policymakers are working to find solutions, but it remains to be seen if these measures will have the desired effect. The world will be watching closely as the situation continues to unfold.

Original Story at www.reuters.com – 2023-09-01 05:25:29