Politburo meetings of the Chinese Communist Party’s (CCP’s) were supposed to unveil new, more effective policies to deal with China’s economic problems. All the Politburo saw, however, was a rehash of existing policies that so far have had little or no substantive effect on the economy. True, since those meetings Beijing has announced a real estate buying policy. But despite its seeming scale, it is small next to the need. Now party leaders have implicitly promised announcements of stronger policy at July’s Third Plenum meetings. Given the behavior of China’s leadership to date, that seems unlikely. Even considering the new apartment-buying policy, Beijing’s behavior to date signals a timidity that in turn implies an inability among China’s leadership to find remedies for China’s severe economic challenges.
Meanwhile, China’s economy has continued to show signs of weakness. Some hope had emerged in the opening months of the year that economic activity beginning to recover. More recent data has, however, scotched that hope. Surveys of purchasing managers show economic activity has slowed again and at best is stagnating between growth and decline. That is an improvement on the outright declines recorded in 2023 but hardly a basis for optimism. Recent statistical releases on services shows outright declines after modest gains earlier in the year. Industrial profits reported for the first quarter have plunged from year-ago levels – for both state-owned and private firms.
The real estate crisis continues unabated dragging down both home sales and construction. April sales among the top 100 developers, according to the China Real Estate Information Corp. (CRIC), are down some 43% from last year’s levels, down 13% from March, and 80% from levels in December 2020 before the crisis broke. Exports had turned up briefly but then weakened again. Even the brief upturn was less a sign of economic health than that the declining value of the yuan has given China a transitory advantage over its competitors in the simpler, price-sensitive products that the nation’s leadership wants to de-emphasize.
Yet, the nation’s leadership in Beijing has only offered small, clearly inadequate measures to right the economy or worse just vague promises of something more. At the March Two Sessions meeting, leadership talked about interest rate cuts the People’s Bank of China (PBOC). They referenced a program called “white lists” in which local governments identify stalled development projects for special financing that state-owned banks will advance after their review. These policies were already in place, leaving the implication that more substantive policy measures would be announced at the Politburo meetings late in April. But all that emerged there were a repeat of these three measures and vague promises of more to come.
Although the “white lists” have merit, Beijing has operated on a much smaller level than is needed. The amounts announced so far are barely over 5% of the initial Evergrande failure in 2021, much less the failures that have occurred among other developers in the years since, including those of Country Garden. Unless the program scales up drastically, the “white lists” are more a talking point for CCP meetings than a policy, much less a remedy for the property crisis.
Since the Politburo meetings, Beijing has announced that it will issue one trillion yuan ($140 billion) in bonds to ease the strain on local government balance sheets and finance local government purchases of now vacant apartments. This effort, though seemingly large, is too small to even put much of a dent in the estimated 7 million empty apartments. It is even less adequate next to the local government debt overhang estimated at 11 trillion yuan.
The PBOC’s rate-cutting program is even less impressive. So far, the bank has cut rates five times but for a total of less than half a percentage point. Such a small move could hardly be expected to raise the economy, even in the best of circumstances. And circumstances are far from optimal. During the time that the PBOC has been cutting interest rates, China has seen a moderate inflation of about 2% a year turn to a moderate deflation of about 0.8% a year. After considering the effect of this change on the buying power of money borrowed and repaid, real interest rates in China have effectively risen and are acting as a disincentive to borrow and spend. The bank would have had cut interest rates by almost 3 percentage points just to keep real incentives as they were when it started. It will have to do a lot more to encourage borrowing and spending.
Some have speculated that that new, more imaginative solutions will make an appearance at the Third Plenum scheduled for this coming July. Something might emerge, but given leadership’s behavior to date, the huge policy shifts China needs to deal with its challenges are not especially likely. It is not even a sure thing that the Third Plenum will come off on time. The party’s governing charter calls for a plenum meeting at least once a year, but China has not had one since February of 2023. This 17-month interval is the longest since Mao Zedong was in charge. Clearly, the party’s and the nation’s leadership does not know what to say.
If the meeting comes off on schedule and if China’s leadership announces forceful policies, the economy might begin a recovery. But these are two big ifs. More likely, recent patterns will prevail, and China will have a struggling economy for some time to come.
Beijing Signals That It Has No Idea What To Do About Its Economy - Forbes
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