During the 2008 Global Financial Crisis, China’s then-Premier Wen Jiabao declared: “In the face of economic difficulties, confidence is more important than gold and currency.” Consequently, a Chinese economic stimulus worth 4 trillion Chinese yuan ($586 billion) was issued to shore up the economy during that year. This economic measure was Beijing’s largest move to respond to the financial crisis.
Nowadays, the prospects of the Chinese economy are worse than over a decade ago, thanks to both internal and external factors. The unemployment rate of Chinese people aged between 16 and 24 rose to a historically high 20.4 percent this April, along with China’s widely reported population decline, a record low number of marriages, and a downturn in the real estate market. Major banks such as JP Morgan, UBS, and Bank of America unanimously decreased China’s 2023 GDP forecasts.
However, Beijing has been reluctant to take action on another massive-scale stimulus. Recent cuts in lending rates linked to residential mortgages have been largely viewed by many economists as mere window dressing, which may not reverse China’s economic downturn.
The reasons behind Beijing’s lukewarm approach are apparent. In Beijing and beyond, it is almost a publicly admitted consensus that the former investment-stimulated growth model, with 10-plus percent growth a year, is unsustainable.
Economists Matthew C. Klein and Michael Pettis showed that by the late 1990s, China had hit a saturation point and had become increasingly unproductive during its investment boom. Notwithstanding employment creation, lack of profits not only led to excess capacity and commodity price inflation but, in particular, increased levels of domestic debt.
According to Bloomberg, without including bank loans to local government financing vehicles (LGFV), China’s total debt reached 279.7 percent of GDP in the first quarter of this year. This was an increase of 7.7 percentage points from the previous quarter, the biggest jump in three years. Goldman Sachs Group Inc. estimated that China’s total government debt is about $23 trillion if LGFVs are included. In 2022, S&P Global Ratings found that corporate debt in China reached nearly $29 trillion in the first quarter, the highest in the world and roughly equivalent to the size of the U.S. government’s total debt. Economist Ma Guonan has argued that China is “the most indebted emerging economy.”
While debt can be an issue, previously many analysts assumed that Beijing would be more afraid of the potential social instability caused by a high unemployment rate. In fact, Liu He, former vice premier and one of China’s chief economic architects, apparently gave a clear answer a few years ago that the leverage issue, rather than unemployment, is more crucial for China. “Even if the economy is experiencing a significant downturn, employment can remain generally stable… However, the issue of leverage is different… Poor control over leverage will lead to a systemic financial crisis and negative economic growth, even causing ordinary people to lose their savings. This will be disastrous.”
That said, it is not difficult to observe that China’s economic measures – from Wen’s 4 trillion stimulus to the Li Keqiang index to Xi Jinping’s supply-side structural reforms – have mostly focused on the supply side. This trend continues despite widespread acknowledgement in China and globally that consumption should become the main contributor of China’s future economic growth.
Behind China’s obsession with investment, there is a grim truth: China’s economic model has transferred purchasing power from Chinese workers and retirees to companies and the government, damaging the consumption capability of Chinese residents. Despite rising real incomes for much of China’s population, China has moved from being a moderately unequal country in 1990 to being one of the world’s most unequal countries, according to the International Monetary Fund. In 2020, former Premier Li Keqiang made the shocking comment that China has 600 million people who live on a monthly income of $140.
So, the current dilemma is this: Beijing cannot issue another massive economic stimulus because of debt concerns, but the recovery of weak consumer confidence won’t happen overnight. Facing this predicament, it is easy to understand why Beijing invited several star entrepreneurs such as Bill Gates and Elon Musk to visit China, and also why Premier Li Qiang visited Europe. All these overtures are about instilling confidence in the Chinese economy.
There may also be another motivation for government restraint today. If Beijing exhausts all of its current financial tools to save the economy now, what can it do if Sino-American conflicts intensify, possibly because of Taiwan? Beijing may need to save its best efforts until the worst day comes.