China is on the brink of missing this year’s economic growth target by a big margin. Time is running out, but the country has introduced a relatively small stimulus.

So what is restraining the Chinese authorities from implementing a large scale of fiscal or monetary stimulus?

According to an economist, stimulus measures have recently produced bad outcomes and the authorities may be weary of the old playbook.

Joe Zhang is a former economist at the People’s Bank of China and now a co-chair of SBI China Capital Group in Hong Kong.

In his opinion article published on Nikkei on September 14, Joe pointed out that China’s real estate market is plummeting, and consumers are holding back from spending or borrowing, especially in the context of the COVID pandemic and the country’s subsequent lockdown.

In order to ease the pandemic-led economic pains, many countries have taken measures to support their businesses and pay cash to citizens.

But in China, there are still no signs the country would rain “helicopter money” down on the public.

Three weeks ago, China’s State Council announced 19 measures to support the economy, including financing for new infrastructure projects and greater allowances for local government bond financing.

State media reported the value of the infusion of funds at 1 trillion yuan (nearly $144 billion).

However, that package is far from the 4 trillion yuan of stimulus spending China unleashed during the global financial crisis in 2008, when the country’s economy was about one-third of its current size.

Joe said that most property developers have seen little benefit from the recent policy announcements as their sales keep shrinking.

To make matters worse, local governments are tightening controls on sales proceeds, preventing developers from moving cash raised from pre-sales at one project to cover costs at others.

As cities scramble to ensure funding for their local projects, developers’ overall liquidity has become tight.

The question is whether China’s economic engineers have lost their mojo, or what is preventing Beijing from unleashing stimulus on a bigger scale.

Joe Zhang said that the answer is implicated in Premier Li Keqiang’s speech delivered to global business leaders at the World Economic Forum in July. At that time, Li said that the Chinese government would avoid flooding the market with stimulus.

Joe said that the authorities may be weary of the same old playbook after four decades.

According to the central bank’s former economist, stimulus spending over this period has produced enough bad outcomes already. They can be listed as: a bloated state sector and a bloated private sector, incremental economic output reliant upon more and more credit, a ratio of debt to gross domestic product (GDP) that is among the highest in the world, and overly leveraged and fragile businesses.

The bad outcomes also include the bursting of the property bubble, the collapse of hundreds of thousands of businesses in the past year, and a crisis stemming from loans gone bad to countries participating in China’s Belt and Road Initiative.

For the government, Joe pointed out that there is now profound doubt about the desirability of credit as a development strategy.

China’s central bank cut two of its benchmark lending rates by a tenth of a percentage point in mid-August. But Joe said that Beijing will very soon find that such modest measures are not enough to boost a sluggish economy.

China’s economy growth stood at 2.5% in the first half of 2022. To meet the government’s target of 5% annual GDP growth, the economy needs to grow more than 8% for the rest of the year.

But time is running out. To ease unemployment and the pains of the debt crisis, Joe Zhang said that China may have to look again at the tactic of massive fiscal or monetary stimulus.

The economist said that China could begin to usher in major policy changes following the Communist Party’s 20th National Congress next month. Before that, there seems little reason to expect more than bigger doses of credit easing and rate cuts and directives to state-owned companies to increase spending and investing.

Joe said that whatever China may choose to do after the national congress, the economy will inevitably miss this year’s growth target by a big margin. 

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