Economic Policy Advisors at the New York Fed. Jeffrey B. Dawson and Hunter L. Clark, writing in a recent ‘Liberty Street Economics’ article (the NY Fed’s blog), summarize the predicament China’s planners now find themselves in.
In addition to the economic challenge of COVID China has additionally had to deal with a monster property collapse. Viz…
Planners have been in response-mode, in fact, since the Evergrande collapse in 2021 but only in September of last year did they come out with an explicit and comprehensive response to the ongoing slack economy.
Opinions vary as to the effectiveness of the response(s) but the Fed. team believe China has done an OK of job of muddling through. Property weakness has been offset by other investment and although the ‘real’ rate of GDP growth may be slower than official claims it’s probably following the same path.
Why haven’t the government done more? Where’s the bazooka? The answer lies in what the researchers call China’s ‘fiscal space’ i.e. the amount of room they have to stimulate before they’d most likely lose control of the economy (remember 2008? The high-ups in Beijing surely do!). The position is exacerbated by the large amount of pig-in-the-python debt working through the local municipalities.
Despite problems with Chinese data at the micro level the article argues that credit growth will work well for the time being as a gauge to how seriously, or not, the economy is being primed. The recent picture there, note the little flick up at the end, is encouraging.
The article concludes noting that if necessary China can dial up credit growth to considerable and swift effect; however, the analysts don’t see this happening.
Such a move would simply take China backwards to old-style industrial led growth when it’s believed planners would rather see increased consumption jog the economy along in future.
Now, if only Chinese consumers would just stop saving so much and start spending some more… But, even if this doesn’t happen soon it seems China is in OK shape and can rumble on, whatever the weather, quite nicely.
You can review the article in full via this link Gauging the Strength of China’s Economy.
Happy Sunday.