China’s economy is beginning to give off signs similar to those seen in the United States during the Great Depression of the 1930s.
No, China has not experienced a stock market crash of the sort the United States suffered in 1929. What China has in common with that historic America is a horrible loss of confidence in the economy’s structures and future. In that America, the loss of confidence was triggered by the stock market crash. In China, Chinese leader Xi Jinping has found other ways. The Chinese picture for 2024 is far from promising.
One confirmation of China’s confidence problem has emerged with the weakness of bank lending. Always a sign of business and consumer spending plans, demands for bank credit, although up from November 2023 to December 2023, were nonetheless 16 percent below where they were in December 2022 and almost 20 percent below consensus expectations. This is all the more remarkable because Beijing has, in past months, tried stimulus through infrastructure spending, while the People’s Bank of China has reduced interest rates and lavishly provided markets and financial institutions with liquidity, increasing the broad definition of money by some 9.7 percent.
The most likely explanation for why Chinese people and businesses have failed to take advantage of the infrastructure spending and this easy credit is that they have lost confidence in the future, at least that they will improve enough to make the risk of going into debt worthwhile.
According to Beijing’s National Bureau of Statistics, the nation’s consumer confidence index has fallen by almost 10 percent from its high of March 2023 and stands at a lower level now than ever, even during the COVID-19 pandemic and the needless lockdowns and quarantines that followed under Beijing’s zero-COVID policy. Business confidence has picked up slightly from late 2023 but remains depressed by just about any historical standard, even going back to the early part of this century when this data collection began.
Even in the absence of a stock market crash, this lack of confidence—this wariness of borrowing and spending—resembles the problems the United States faced in the Great Depression. Observing American behavior at the time, renowned economist John Maynard Keynes noted how stimulus from Washington and a flood of money from the Federal Reserve had failed to get the American economy moving. Government stimulus, he pointed out, will only work if consumers and businesses have enough faith in the future to follow it with their own spending and investment. If they lack the confidence to do that, the stimulus quickly runs its course, and the economy, after perhaps a brief improvement, falls back into slow growth or decline. The same is true of monetary stimulus. No matter how much liquidity the central bank provides, a lack of confidence will prevent businesses and consumers from using it. He called this phenomenon the “liquidity trap.”
Now, China seems to be suffering from the same ailment, and most of the blame can be laid at the feet of Xi. His first contribution to this mess was his decision in 2019–20 to suddenly withdraw Beijing’s long-provided support for residential property development. That decision caused a collapse in this once-important sector in China’s economy and also a drop in property values with devastating effects on household wealth.
Xi’s second mistake was to offer, at best, a tepid response to the real estate collapse. From the first failures of property developers in 2021 until only a few months ago, Beijing pretended that matters, contrary to reality, required nothing of the authorities. Consequently, the problems of the property sector and household wealth metastasized throughout China’s financial system, further hurting the economy and eroding confidence.
The zero-COVID policy was Xi’s third contribution to China’s woes. That policy kept the Chinese economy under lockdowns and quarantines for at least 18 months longer than the rest of the world. His goal was an impossible one: to eradicate the virus. In pursuit of that dream, he held back China’s economy and created the sense among people that they could no longer count on a regular income and the sense among businesses that there was little sense in expansion.
If that were not enough, Xi also engaged in rhetoric castigating private Chinese businesses during this time, insisting that managers and owners give up the pursuit of profits to follow the Chinese Communist Party’s agenda. More than all else, this sort of talk made Chinese business owners wary of the future and unwilling to invest in hiring or expansion.
