China’s current economic problems date back to at least 2009 with rapid debt accumulation, and possibly 2006 with anti-competitive policies. Ignore anyone who discovered these problems during zero-COVID. Similarly for those who believe Beijing’s loud monetary and fiscal stimulus steps last week can matter for longer than a year. American investment may be flowing to the People’s Republic of China (PRC) as we speak, but China’s economy remains on its road to nowhere.
The monetary side of this is easy: It largely doesn’t work. The stock of broad money M2 is about $43 trillion, twice that of the US despite annual GDP being $10 trillion lower. August M2’s 6.3 percent gain was the lowest on record for the PRC—it’s been rising for more than a decade while GDP and wealth growth faded. Monetary policy is a spent macroeconomic force.
It’s not spent for asset prices. Stocks rose sharply last week and will rise further. Just not for long. The Shanghai composite peaked in 2007 and remains nearly 50 percent below that level. Stocks are comparable to where they were in May. In terms of making consumers feel wealthier, the last time stocks rallied for long enough to do so was 2014. A brief spike is most likely, which wouldn’t bring consumers out of their shell.
On the fiscal side, expenditure to date this year has inched up year-on-year and slid in August alone. The expectation is bonds will be issued to cover much quicker spending, some of which will support trade-ins of old consumer goods for new. This will pull consumption forward—more sooner but less later, since the new goods won’t get replaced as quickly. It will support the economy for three to four quarters, then be a drag.
A second use is converting local government debt into central. It’s not sensible to consider local authorities as independent spenders after 12 years of Xi Jinping in charge. Instead, the center is offering something of a green light for real estate development. It’s very unlikely, however, the goal is to undermine years of pain trying to deflate the property bubble. The Party almost surely just wants to finally stabilize that market.
Another use of fiscal outlays may be recapitalizing banks to spur lending. The PRC’s loans go overwhelmingly to firms, not consumers. If firms are receptive, they will further boost production capacity. Stimulus-driven forecasts of higher commodities demand reflect this. Beijing may want more capacity but the world doesn’t. Trade tension could be worse in 2025 and worse again in 2026, when China’s consumption reverts to trend.
Not mentioned last week, unsurprisingly, were pro-market reforms such as an expanded role for private companies or private ownership of rural land. These could boost, respectively, innovation and wealth for the poorest parts of the population. Cash transfers to families with two or more children are promised but, without a good decade of duration, are utterly overmatched by demographic collapse that will strongly and indefinitely inhibit economic growth.
Many observers ignore pro-market reforms while touting Keynesian magic. The government just needs to provide enough stimulus, they say, then things will be miraculously better for years. That it never works merely shows policymakers never do enough. China running up huge amounts of debt since 2009 while growth slowed dramatically can be fixed by running up much more debt.
The PRC’s economic health will likely get worse at some point in 2025 or 2026 due to stimulus. But that’s not what these quasi-Keynesians actually care about. They care about Beijing avoiding a crisis; the twist being there’s no crisis for China. The labor force is shrinking—fast growth isn’t needed for jobs. Movement up the technology ladder is going well (unfortunately for the US).
The crisis is for people who bet, professionally and financially, on Chinese asset prices roaring out of the end of zero-COVID at the close of 2022 or being boosted by a government that they insisted MUST ACT in 2023. They’re the ones thinking desperate measures were needed. Xi and his subordinates are more interested in credibility regarding their 2024 GDP target.
China stock hype will be loud for a bit, as if the bull run is durable and portends a genuinely better economy. It’s probably not and it certainly won’t. But at least some financials will book smaller investment losses. Unless they get carried away again.
American policymakers don’t have to worry about an economically reinvigorated China. They still must worry about a stagnating but very large China. Trouble we have abetted, with our technology and money. Stimulus cheerleaders are calling for American money to pour across the Pacific. Among other things, this is a good time for Congress to do its job on outbound investment.
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