In 2011, the American Economic Review published an influential article titled “Growing Like China”. Its authors, including Zheng Song of the Chinese University of Hong Kong, attempted to explain China’s particular pace and pattern of development. The headline was as well received as the argument, echoed in a variety of articles such as “Innovate Like China”, “Invest Like China” and “Internationalize Like China”.
This year, however, the country is not developing at all like China. Thanks to its deep real estate crisis and the government’s ‘zero-covid’ policy, which involves closings in response to every virus outbreak, the economy is now expected to grow by less than 3% in 2022, according to banks such as Nomura. , Morgan Stanley and ubs. This is well below the official target of 5.5%.
The Chinese currency is also weakening. On September 16, it took more than seven yuan to buy a dollar for the first time since July 2020. A gap has widened between the GDP trajectory envisioned for China at the start of the year and the bleaker one that now seems likely . China’s GDP in 2023 could be more than $2 trillion lower than expected in January, estimates Goldman Sachs, another bank.
It’s not like China is content with such an underperformance. In the past, economists have marveled at its ability to stimulate spending when necessary, in order to meet its growth targets and adequately employ its busy workforce and workshops. Even after the 2008 global financial crisis, China’s GDP quickly caught up to where it would have been had the crisis never happened. Impressed by this result, Yi Wen of the Federal Reserve Bank of St Louis and Jing Wu of Tsinghua University wrote another “like China” paper, titled “Resisting the Great Recession Like China.”
The country’s resilience, they argued, rested on the unconventional anti-collapse tools at its disposal. China, like other countries, eased its monetary policy when the global financial crisis hit. But in other countries, businesses and consumers remained reluctant to borrow, even at rock-bottom interest rates. As a result, monetary easing has not translated into strong credit expansion. In China, by contrast, state-owned enterprises and local government finance vehicles (which invest in infrastructure and other civic projects) have borrowed eagerly from Chinese banks at the behest of the government. Other countries have pushed on a string. China had other strings to pull.
Why, then, isn’t China weathering this year’s downturn as it has in the past? Its budget deficit, broadly defined to include off-budget borrowing, will increase this year. But only about 3% of GDP, according to Goldman Sachs. The fiscal swing was closer to 4% of GDP in the two years from 2008 to 2010. And it was even larger in response to China’s housing slowdown in 2015. important part of this year’s stimulus, compared to the negligible role they played in 2008-2009. It could be more efficient if companies knew better than the government how to spend the money. But it can be less effective if companies choose not to spend it at all.
Local governments and their funding vehicles, which led recovery efforts in 2008, are no longer so bold. The real estate crisis has hurt land sales, which accounted for about a third of their income last year. And the signs of financial stress are not limited to the ledgers. To plug budget holes, 80 of the 111 cities tracked by Southern Weekly, a continental newspaper, increased the amount of fines collected last year. Yulin, a city in Shaanxi province, fined a grocer 66,000 yuan ($9,500) for selling 2.5 kg of celery below average. A debt-ridden public bus company in Lanzhou, the capital of Gansu province, has come up with an ingenious idea to pay the unpaid salaries of some of its employees. Unable to apply for additional loans itself, it offered to the employees themselves to take out loans, which the company undertook to repay.
The lack of greedy borrowers is blunting China’s monetary policy, just as it did in other major economies after the global financial crisis. China has cut various interest rates, including its first benchmark deposit rate cut since 2015. Yet faster money supply growth has so far not translated into an equivalent credit acceleration .
In principle, the central government could do more itself to revive growth. This could increase spending or help fill financial gaps experienced by lower levels of government. It allowed local authorities to issue an additional 500 billion yuan of “special bonds” (which are supposed to be repaid with revenues from the infrastructure projects they finance). But that’s both less than many analysts expected and less than necessary.
Chinese leaders may be seeking to avoid past mistakes, even if that also means giving up on past successes. Xi Jinping, China’s president, and Li Keqiang, its prime minister, took office in 2013, several years after the financial crash, when the unwanted side effects of China’s stimulus efforts hit hard. Torrential spending by the many branches of the state has left behind excess capacity, a skewed pattern of production, and heavy debts. Mr Li has repeatedly promised not to resort to “flood-like” stimulus measures, a veiled reference to the past.
From hero to zero
But there is a simpler explanation for the change in approach. Mr. Xi has been deeply invested in maintaining a “zero-covid” regime, which he describes as proof of China’s superior social model. Local governments are under pressure to limit infections; a preoccupation that would divert them from an all-out effort to relaunch public investment, even if the financing were available. Additionally, the ever-present threat of lockdowns has shaken consumer and business confidence. Thus, any additional public spending would be less effective in stimulating private spending. Other countries could overtake the country’s economy this year. But no one fights covid like China.
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From The Economist, published under licence. Original content can be found at https://www.economist.com/finance-and-economics/2022/09/20/chinas-rulers-seem-resigned-to-a-slowing-economy