Nine months after the end of China’s zero-Covid policy, its economy is still sluggish and showing signs of distress. A host of data and developments are raising concerns, while President Xi Jinping remains rigidly against large-scale stimulus and/or deep monetary policy loosening to boost growth, while tightly focused on securitization efforts against domestic and foreign threats.
August marked the fourth consecutive month of declining exports, with a sharp 8.8 percent monthly drop. Imports, too, registered a 7.3 percent decline. This contraction in trade not only reflects global economic challenges, it also indicates fragile domestic demand. Inflation data, while above expectations, further points in this direction. August saw a 0.1 percent rise in consumer prices, following a 0.3 percent decline in July that had placed the country in deflationary territory. This very modest uptick reveals persistently weak demand and subdued consumer sentiment. Moreover, the manufacturing sector, as measured by the purchasing managers’ index (PMI), contracted for the fifth consecutive month in August.
The real estate sector, which accounts for roughly a quarter of the Chinese economy, continues to struggle. Country Garden, formerly the nation’s largest developer, missed coupon payments in August and has announced USD 7 billion in losses for the first half of the year. The company now finds itself in a desperate bid to restructure its debt as it hopes to avoid the fate of the failed real estate giant Evergrande, which filed for bankruptcy in New York last month. Country Garden symbolizes broader problems in the real estate sector that are dragging down overall growth and sentiment.
The response from Beijing has been disciplined. Xi has signaled that he wants to hold the line and avoid the kind of mass stimulus employed in response to the global financial crisis, nor is he willing to distribute additional resources to households. As firms like Country Garden buckle under their debt, state-owned enterprises and banks can step in to acquire assets, providing liquidity and spreading out what would otherwise be concentrated contagion risk. Similarly, Xi is likely to continue to take his available resources and, rather than allocating them towards growth, use them to mitigate the technology risks from its escalating rivalry with the US.
New measures and statements have sought to prop up business and consumer confidence. But due to their often-marginal scale, these have yielded limited results. For example, mortgage downpayments were recently lowered, and cities like Shenzhen and Guangzhou have widened incentives for first-time homebuyers. Those steps generated a surge in purchases, but only two weeks later, it fizzled out.
MERICS analysis: “While previous leaders answered economic headwinds with reform and opening up, or with intensive stimulus, Xi is operating under a different playbook and with very different priorities,” said Jacob Gunter, Senior Analyst at MERICS. “With limited resources at hand, Xi faces a tradeoff of trying to juice growth the old-fashioned way or to maintain his campaign to unravel domestic risks like those in the real estate market and foreign ones like closing the tech gap with the US, and he is clearly prioritizing the latter.”
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