Beijing’s September effort to revive China’s sad economy has disappointed. The authorities have promised more, but after a litany of failures, there is clearly little confidence that whatever follows will do the job. It is not even clear that Beijing knows what to do next. The smart betting is that China’s economy will continue to struggle.
Lately, observers have begun to speculate that Chinese leader Xi Jinping is less interested in the essential work of getting the economy moving than he is in the embarrassment of financial failures. They point out that such a bias is clear in the September policy emphasis on interest rates, monetary easing, and special help for finance.
To be fair, not all of Beijing’s September efforts focused on finance and financial firms. The authorities made gestures to revive home buying and rid the markets of surplus units. Lower mortgage rates and new ways for existing homeowners to reduce the burden of financing were included. But as the Oct. 2 discussion pointed out, these efforts were hardly sufficient to offset the effects on household wealth from the 12 percent drop in real estate values since 2021, much less the string of failures among housing developers, such as Evergrande and County Garden, during this time.
What makes the disappointment with this latest Beijing effort especially profound is that it comes after a long series of policy mistakes by China’s central planners. Many of those missteps contributed to the problems that the planners are now trying to remedy. These errors and China’s economic problems began with Xi’s “zero-COVID” measures. These extended the shutdowns associated with the pandemic from two years after the rest of the world had begun to re-open their economies. Not only did these policies disrupt trade relations that were important to China’s economy and its businesses, but they also undermined confidence among Chinese wage earners that they could count on a regular income. These insecurities linger to this day.
If the pandemic measures were not a burden enough on Chinese economics, Beijing in 2020–2021 decided that the country needed to shift away from real estate development as an engine of growth toward higher-technology pursuits. Accordingly, after decades of promoting real estate development through all sorts of financial support and cozy relations with local governments—policies that once raised such activity to nearly 45 percent of the economy—Beijing abruptly removed the support without giving anyone involved time to adjust.
Not surprisingly, large developers who had become highly leveraged with debt to take advantage of past support began to fail. This ugly pattern started with Evergrande’s massive failure in 2021 and has since spread across all real estate developers. Because Beijing did little or nothing to mitigate the effects until 2023, these financial failures brought a collapse in homebuying, a sharp decline in real estate prices, and so burdened Chinese finance that it has been unable to support growth as well as it might have.
In a more recent policy error, the planners decided in 2023 that they could replace China’s otherwise failing growth engine with an emphasis on critical industries, including electric vehicles, artificial intelligence, and other technology-oriented activities. Beijing poured money into these areas—money that might have been better used to relieve the burdens on China’s consumers, associated businesses, and financial markets.
Because China’s already weakened economy could not support the expanded output in these areas, and Beijing’s stubborn intransigence in the face of complaints from Western and Japanese trading partners made them unwilling to buy from the sudden rise in China’s high-tech capacities, all the recently built capacity gained no higher levels of activity.
