In recent days, China has cut interest rates, eased lending rules, reduced the cost of financial transactions and released an extra 1 trillion renminbi (€127 billion) for new infrastructure. These are the latest in a series of measures aimed at reviving an economy that has failed to recover since zero-Covid restrictions were lifted last year.
Each week brings more dismal economic data on everything from industrial output and retail sales to foreign investment in the Chinese economy. After youth unemployment moved above 20 per cent, the authorities said this month that they would no longer publish that statistic.
China’s economy is undergoing a crisis of confidence caused by a property crash that has driven some of the country’s biggest developers to the edge of bankruptcy. Anxious about the future, consumers and businesses are saving rather than spending and while western countries are battling inflation, China’s fear is of deflation.
Although the authorities have introduced some measures to boost demand, they have so far had little impact. And the Communist Party leadership has been reluctant to use the state’s enormous financial firepower to stimulate the economy on the scale many international experts believe is necessary.
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The property crash followed curbs on developers’ lending designed to deflate a bubble that had created unsustainable levels of debt within the industry. Now the government fears that massive stimulus spending could fuel risky speculation and that cash handouts might prove ineffective.
As the economic picture darkens, China’s leaders may be forced to put aside their reservations about stimulating a consumption-led recovery. And as its abrupt abandonment last year of zero-Covid restrictions showed, an autocratic system can accommodate the swift reversal of even the most fervently advocated policies.
Although most of China’s economic problems are domestic, geopolitical tensions have also played a role, particularly in the decline seen in foreign investment. United States commerce secretary Gina Raimondo said during a visit to China this week that many American firms regarded the country as too risky to invest in.
Fines, sanctions and raids on foreign companies’ offices in China have had a chilling effect and many are moving some of their operations out of the country. US sanctions and export controls targeting China have also hit confidence and created uncertainty about the future trade relationship.
Raimondo’s visit, the third to China by a senior US official in as many months, is an encouraging sign of easing tensions between Washington and Beijing. A prolonged downturn in China would have serious consequences for the global economy. Its trading partners, including the EU, would benefit from an early Chinese recovery.