China’s Measures to Boost Economy Don’t Match Past Efforts
By Stella Yifan Xie and James T. Areddy, Aug. 16, 2022, WSJ

HONG KONG—For the past two decades, China has conditioned global companies and markets to anticipate big govt spending at any hint of an economic slowdown. Now, as growth sputters, Beijing is taking only small steps toward boosting its ailing economy.

On Monday, China’s central bank cut two key interest rates, as fresh economic data showed a range of economic activity slowing in July. Unlike in the U.S., interest rates in China have a limited effect, and economists said the move would likely do
little to encourage further borrowing by households and businesses.

The world’s second-largest economy is facing headwinds ahead of a Communist Party gathering where Chinese leader Xi Jinping is expected to break with recent precedent and claim a third term.

The country’s zero-Covid policy is restraining domestic consumption. A mortgage revolt over properties unfinished by heavily indebted developers has dragged the property sector into deeper distress. Even at slightly lower interest rates, private
businesses have little appetite for new loans, and the biggest borrowers, state-run enterprises, are less sensitive to changes in credit conditions.

While economists say more rate cuts from the People’s Bank of China are likely in the coming months, few expect the govt to offer big bazooka-style stimulus with massive new official spending as it has used to address past slowdowns.

In response to the 2008 global financial crisis, Beijing unleashed more than 4 trillion yuan, equivalent then to roughly $586 billion, of stimulus spending that amounted to nearly 13% of its GDP. In relative terms, it was about 3 times the size of
efforts taken by the U.S., according to the OECD.

At a meeting last month, the Communist Party’s top policy-making body didn’t announce fresh stimulus as some expected. Instead, officials effectively acknowledged the overwhelming downward pressure and abandoned their 5.5% target for full-year growth.

The absence of more-powerful stimulus measures from Chinese leaders this time in part suggests that Beijing is more keenly aware of the unsustainable nature of the country’s traditional approach to supporting the economy by borrowing to spend big on
infrastructure, economists say.

“There are some real fiscal constraints in China in a way that there weren’t back in 2008,” said Nicholas Borst, director of China research at Seafarer Capital Partners LLC, an investment-advisory firm. “The economy as a whole is much more
indebted than it was.”

As of December, total govt debt in China—including central and local governments—was estimated to reach about 120% of GDP, up from 60% in 2014, according to his research. More significantly, other forms of govt debt, including local govt’s off-
balance-sheet borrowing, grew rapidly and were nearly 5 times as large as explicit central govt debt.

The burden of stimulating the economy in China has traditionally fallen primarily on local govts, which became more financially strained this year as land sales dried up and tax revenue plummeted amid Covid-19 disruptions.

Another possible reason behind Beijing’s reluctance to prop up growth more aggressively is that China’s familiar formula for stimulating the economy is yielding fewer benefits than in the past.

As compared with the financial crisis in 2008, it required three times more credit to produce additional economic growth in 2015, according to findings by economists from the International Monetary Fund. Because China has built so much already, the
infrastructure works it targets have an environmental dimension that often makes for smaller footprints and less job creation than the construction in the past, such as highways, railways and new business districts.

Evidence of a push toward a broader concept of infrastructure spending was apparent in China’s July figures, which showed some of the strongest infrastructure-investment growth in environmental projects, such as water-conservation works, which UBS
Group AG says accelerated 18.4% year-over-year from 18% in the previous month. Investment in projects such as subways remained more muted, as transportation sector spending grew 2.1% from 1.2% in the previous period.

While the infrastructure China has built in recent decades has modernized the country’s landscape and employed multitudes, the IMF argues such spending hasn’t been matched with outlays that might make individuals confident to spend. “We really want
to see more-forceful fiscal support, with a clear shift in the composition of the support to households, to support their private consumption,” Joong Shik Kang, deputy mission chief for China at the IMF, said this week.

Measures such as increasing benefits to retirees and unemployed people that the IMF advises China to adopt would shore up its social-safety net. It also suggests China could scale up direct cash transfers to individuals via the digital e-CNY currency
that the central bank has developed but not formally launched.

Another problem for China is that the effect of any stimulus measures Beijing takes now will likely be muted by the country’s strict Covid-19 policies, which have battered business and consumer sentiment.

“As long as zero-Covid remains intact, it’s very challenging to revive consumption or private-sector confidence,” said Tommy Wu, an economist at Oxford Economics. “The economy could be in for a long grind,” he added. The research firm in early
August lowered China’s full-year growth forecast from 4% to 3.2%.

Some economists say the lack of more-assertive measures to support the property market might also reflect a political paralysis ahead of the Communist Party conclave this fall, because officials are reluctant to take steps that could be seen as going
against Mr. Xi’s priorities of reducing overall indebtedness and reining in speculation in the housing market.

In the best-case scenario, stimulus in the property market, or a debt-restructuring package might arrive in late November at earliest, with many officials waiting to see the outcome of the 20th Communist Party Congress, economists from Société Géné
rale SA wrote in a note to clients on Monday.

Meanwhile, China’s slowing economy is reverberating globally. The country’s waning appetite for building bridges and apartments has weighed on global metals and oil prices. Brent-crude futures dropped by over 5% and copper prices fell 2.5% following
China’s lackluster economic data release on Monday.

Global companies counting on China’s gigantic consumer market are also feeling the pinch. Kentaro Fujiwara, the chief executive for Japanese makeup brand Shiseido Co., told investors last week that growth in the past decade had been supported by e-
commerce, underpinned by stable employment and rising incomes, powered especially by younger people. Today, he said, consumers want to save money.

“Changes are so dramatic in China,” he said, according to a transcript of his remarks.

The lockdown of the Shanghai market broadly undermined consumer products, with camera maker Nikon Corp. saying this month that sales had stagnated in the latest period, and Adidas AG reporting a 35% drop in Greater China sales. The sportswear company’s
chief financial officer, Harm Ohlmeyer, forecast a double-digit decline for the full year.

“We are no longer expecting sales in China to recover in the second half,” he said.

https://www.wsj.com/articles/chinas-measures-to-boost-economy-dont-match-past-efforts-11660660175

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