When China suddenly lifted its lockdowns and other Covid precautions last December, officials in Beijing and many investors expected the economy to spring back to life.
It didn’t work that way.
Investments in China stagnated this spring after hectic late winter activity. Exports are shrinking. Fewer and fewer new housing projects are being started. The prices fall. More than every fifth young person is unemployed.
China has tried many solutions in recent years, such as borrowing heavily to finance roads and railways, as its economy has faltered. And it spent huge sums on testing and quarantines during the pandemic. Borrowing additional stimulus spending now would trigger a stimulus boost, but represents a difficult decision for policymakers already worried about accumulated debt.
“Authorities are at risk of lagging behind in stimulating the economy, but there is no quick fix,” said Louise Loo, a China economist at Oxford Economics’ Singapore office.
China needs to get its economy back on track after nearly three years in lockdown to fight Covid, a decision that prompted many companies to relocate their supply chains elsewhere. Xi Jinping, China’s leader, met with United States Secretary of State Antony J. Blinken on Monday in a bid by the two nations to ease diplomatic tensions and clear the way for high-level economic talks in the coming weeks. Such discussions could slow the recent spread of sanctions and countermeasures.
With China’s economic recovery stalling, only a few categories of spending have surged, such as travel and restaurant meals. And these have risen from extremely low levels in spring 2022, when a two-month lockdown in Shanghai disrupted economic activity across much of central China.
The economy has been particularly weak in recent weeks.
“From April through May to now, the economy has seen significant unexpected changes, to the point where some people believe the initial judgments may have been overly optimistic,” said Yin Yanlin, former deputy director of the Communist Party’s top economic policy commission of China, he said in a speech at a scientific conference on Saturday.
Chinese government officials have dropped hints that a stimulus plan could be imminent.
“In response to the changes in the economic situation, more vigorous measures need to be taken to boost development momentum, optimize economic structure and promote continuous economic recovery,” the country’s State Council or cabinet said after a statement meeting on Friday led by Li Qiang, the country’s new premier.
China’s economic weakness harbors advantages and dangers for the global economy. In China, consumer and producer prices have fallen over the past four months, slowing inflation in the west by lowering the cost of imports from China.
But weak demand in China could exacerbate the global economic slowdown. Europe was already in a slight recession at the beginning of the year. The rapid rise in interest rates in the USA has prompted some investors to bet on a recession there at the end of the year as well.
Beijing has already taken some steps to revive economic growth. Tax breaks will be introduced for small businesses. Interest rates on bank deposits have been lowered to encourage households to spend more instead of saving. The latest government action was announced on Tuesday, when the state-controlled banking system cut interest rates on corporate loans and home mortgages.
But many economists inside and outside China are concerned about the effectiveness of the new measures.
Consumers are hoarding cash and investors are reluctant to put money into Chinese companies. In fact, private investment has declined so far this year compared to 2022. Housing remains in the doldrums as developers borrow more to pay off existing debt and complete existing projects, even as China is already suffering from an oversupply of housing.
China’s real estate market is at the heart of its troubles. The construction industry accounts for up to a quarter of China’s economic output. However, would-be homeowners were deterred as developers failed to pay off their debts and failed to complete homes that buyers had paid for in advance.
Residential construction fell nearly 23 percent in the first five months of the year compared to the same months last year. This suggests that the real estate sector will continue to decline in the coming months.
Chen Leiqian, a 27-year-old marketer from Beijing, started looking for an apartment with her boyfriend in 2021 after a five-year relationship. But then they decided to stay in a rented apartment after their marriage.
“Across the country, property prices are falling and the economy is very bad — there are just too many unstable elements,” Ms. Chen said.
Two-thirds of Ms. Chen’s colleagues in her department at an online tutoring company were fired after China cracked down on the for-profit, private education industry in 2021. She also had a friend who couldn’t pay a mortgage after losing a job in the tech sector and losing the home through foreclosure.
The caution of middle-class families like Ms. Chen’s may pose the biggest dilemma for policymakers trying to find an effective formula for another round of economic stimulus.
“You can throw money at people, but if they’re not confident, they won’t spend it,” said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, a French bank.
Not only are households struggling to pay their debts, but also local governments, which have limited their ability to increase infrastructure spending.
The government is shying away from triggering another credit explosion of the kind seen in 2009 during the global financial meltdown and in 2016 after China’s stock market plummeted the year before.
Although the flagging real estate sector has weighed on demand in China, exports have been flat this year and even fell in May. The weakness of China’s normally strong exports is particularly notable because Beijing has allowed its currency, the renminbi, to depreciate around 7 percent against the dollar since mid-January. A weaker renminbi makes Chinese exports more competitive in foreign markets.
More exports help create jobs and could offset the otherwise weak domestic economy. However, it is not clear to what extent China can count on exports to help, as some of China’s largest trading partners have shifted some purchases to other countries in Asia.
In the United States, the Trump administration imposed tariffs on a variety of Chinese manufactured goods, making it more expensive for American companies to buy from China. Then, last year, President Biden convinced Congress to approve large subsidies for American manufacturing in categories like electric cars and solar panels. China’s exports to the United States fell 18.2 percent last month compared to May last year.
Now, as China ponders strengthening its economy, it is grappling with a loss of consumer confidence.
Charles Wang runs a small travel company with eight employees in Zhangjiakou, northern China. His business has almost fully recovered from the pandemic, however he has no plans to invest in expansion.
“Our economy is actually in decline, and everyone has run out of time and willingness to spend,” Mr Wang said. “It’s because people just don’t want to spend money – everyone’s scared again, even the rich.”
Li You contributed to the research.