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Why the Chinese government is struggling to revive the economy

C.Hina’s Post-Corona The recovery was supposed to be world-shaking. Rather, it simply looks unstable. Economic data fell short of expectations in April after pen-up demand was first announced. In response, Chinese stocks slumped, government bond yields fell, and the currency depreciated. The country’s trade-weighted exchange rate is now as weak as it was in November, when authorities imposed lockdowns.

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Will the data in May be better? At the end of the month, the National Bureau of Statistics released the Purchasing Managers Index (afternoons). It showed that service output growth was slower than in April and that manufacturing activity contracted for the second month in a row. Another manufacturing index from Business Paper Caixin was more encouraging, perhaps because inland heavy industry is underweight and may benefit less from a consumption-led recovery.

both sets afternoonIt also suggests that the prices manufacturers pay for inputs and the prices they charge for outputs are falling. Some economists now believe producer prices — the prices charged at the “factory entrance” — may have fallen more than 4% in May compared to a year ago. Such price cuts have adversely affected industry profits and, in turn, discouraged investment in manufacturing. This has raised concerns about a deflationary spiral.

As a result, China’s economy faces an increasing risk of a “double-dip,” said Nomura Bank’s Tin Lu. Even if there is headline growth, the growth from one quarter to the next can be near zero. GDP Compared to a year ago, it’s still impressive.

Elsewhere in the world, slowing economic growth is accompanied by uncomfortable inflation. This makes it difficult for policy makers to know what to do. But China’s problems of slowing growth and declining inflation are headed in the same direction: monetary easing and an easing fiscal stance.

Some investors fear the Chinese government’s concerns aren’t enough. Central banks seem indifferent about deflation. Even without much stimulus, the government is likely to hit its modest 5% growth target this year simply because the economy was so weak last year.

That stance will soon change, predicts Robin Shin of Morgan Stanley Bank. In 2015 and 2019, he said, policymakers reacted swiftly to manufacturing disruptions. afternoon It was below 50 for several months. He is confident the People’s Bank of China will cut bank reserve requirements in July, if not earlier. He also believes China’s policy banks, which lend to support development goals, will increase credit for infrastructure investment. That should be enough to make the slowdown a “problem”.

Some people are less optimistic. The government will act, Mr Lu argues, but a small adjustment won’t clear the gloom for long. Trying to provoke a greater response faces another obstacle. Authorities could cut interest rates, but that would hurt the profitability of banks already worried about losing money on real estate loans. We may be able to send more money to local governments, but many have in the past wasted money on inadequate infrastructure. Cash can be distributed directly to households, but building a device to do so would take time. Governments used to be able to quickly stimulate the economy through investments in real estate and infrastructure. Since then, that “toolbox has gotten smaller and smaller,” Lu said.

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https://www.economist.com/finance-and-economics/2023/06/01/why-chinas-government-might-struggle-to-revive-its-economy Why the Chinese government is struggling to revive the economy

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