For some time, China watchers have wondered when and how Beijing would move to stimulate its sluggish economy.
Recently, Beijing has been unveiling a variety of measures that it says are designed to stimulate an economy that is struggling to expand and suffering from a massive debt overhang. Despite all the pomp and circumstance surrounding the announcement, what is notable is how underwhelming the details are.
Despite official releases showing the Chinese economy growing robustly, around 5 percent annually, the reality seems much different from state propaganda. Real estate and construction-linked sectors are rapidly declining even when using official numbers. Consumption-focused measures are officially just above zero growth, and many industries, such as domestic car sales, are suffering major losses, with only export sales buoying the outlook.
To arrest the unofficial slowdown, Beijing is finally rolling out a series of measures it touts as seeking to stimulate the economy. What is notable about the measures is how little they are actually doing.
For instance, ahead of the Oct. 1 National Day holiday, Beijing announced small direct transfers to the very poor. Not only are the amounts of money small but they are also targeted at very small groups of people and have minimal impact on the overall economy. Even though some localities are engaging in localized stimulus, the measures are very targeted and represent small amounts that are unlikely to have any significant impact other than helping struggling producers.
However, much of the remaining announced measures seem more like retreading policies and attempts at plugging holes rather than stimulating the economy to get on a better footing. Interest rate cuts for borrowers range from corporate to household mortgages designed to put money in consumers’ pockets. Having already managed mandated mortgage rate cuts a year ago with little impact, this year’s repeat is unlikely to have any material effect on the economy. Additionally, lowering interest rates when borrowers have little interest in borrowing more and facing an economy struggling with a massive surplus overcapacity will do little to stimulate the economy other than ease the pain of interest costs.
Other policies rolled out are clearly designed to plug holes in Chinese finances rather than boost the economy. Beijing recently announced that it would raise the retirement age to shore up multiple provincial social security schemes that had gone bankrupt and others that were struggling to make payments. Another initiative will be to spend a reported $142 billion to recapitalize major state-owned banks with the aim of boosting lending. With so many small- and mid-size Chinese banks being absorbed into larger banks to avoid collapse and the lowering of reserve ratios, even by official metrics, Chinese banks are dangerously low on capital. With a banking sector managing nearly $60 trillion in assets, a recapitalization of $142 billion does not begin to scratch the surface of what is needed to shore up the broader industry, even if used efficiently.
The current raft of measures suffers from a number of problems.
First, these measures, from lowering interest rates to boosting lending, repeat the same policies that caused China’s problems in the first place. More lending cannot fix the debt overhang that plagues Chinese consumers, local governments, and corporations. That is like giving a drowning man more water.
Second, what is notable is how intellectually bankrupt the policies are, as if Chinese Communist Party cadres can conceive of no other solutions. This intellectual vacuousness stems from an inability to conceive of a state that would not control every economic decision by an independent actor. Interest rate cuts are mandated to all borrowers with detailed estimates of how that money will be spent. Still, they do little to change the incentive of how actors believe the system operates and their incentive to behave within the system. As long as the Party cadres remain trapped within their narrow understanding of how an economy can operate, there will be little longer-term change to the Chinese economy.
Third, even the money being spent is designed, first and foremost, to protect the Party’s grip on power. Recapitalizing banks and raising the retirement age are designed to boost state finances, not the economy. The Party can deal with a weak economy and control the people, but it cannot deal with a weakened state that is unable to control people.
Despite all the headlines about the Chinese stimulus, the reality is that it is more of the same: delaying any reforms is a game of time. The Chinese economy is weak, and these measures will do little to turn things around.
