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China’s complex economic problems, including property sector turmoil, rising local government debt and soft consumption, have sparked calls for Xi Jinping to unleash billions of dollars to shore up spending, arrest a slide into deflation and prop up a weakening currency.
Yet the Chinese president has refrained from providing broad-based stimulus, the latest example of how his focus on domestic and external security is shaping his response to problems in the world’s second-biggest economy, analysts said.
According to experts in Chinese politics and economics as well as government advisers in Beijing, the leadership is comfortable with slower growth rates and is wary of pulling the trigger on any big changes that would add to government debt or risk instability in the financial system.
“If you decide to dramatically spend more money on something, you have to cut back on something else . . . it is an extremely hard discussion to have given that you’re not going to cut technology investment, national defence or internal security,” said Victor Shih, a professor of Chinese political economy at the University of California, San Diego.
Yu Jie, a China expert at the UK think-tank Chatham House, said a close reading of Chinese government announcements and speeches over recent months, including statements from the politburo, showed the top leadership was clear-eyed about the severity of the economic downturn.
But Beijing’s priority in the face of an increasingly hostile external environment was security and self-reliance, not economic growth, she said.
“It is no longer about double-digit economic growth but rather seeking security, that broader sense of scientific and economic self-reliance,” she said.
In recent weeks Chinese authorities unveiled a series of interventions designed to shore up growth, particularly in property, which accounts for more than a quarter of economic activity in the country. To help stabilise the real estate market Guangzhou, Shenzhen, Beijing and Shanghai have expanded the definition of first-time homebuyers while the central government has also cut both interest rates and downpayment ratios for mortgages.
On Friday, the People’s Bank of China cut the amount of foreign currency that financial institutions are required to hold in reserve, providing further support for the renminbi which has fallen more than 5 per cent against the dollar this year. Teams of central bankers and other financial experts have also been dispatched to the most debt-laden provinces to restructure liabilities.
There are also expectations of further infrastructure investment.
And yet after China’s economic data for July missed market expectations — much of it by a wide margin — economists have been trimming their forecasts for gross domestic product growth to below the government’s target of 5 per cent while calling for stronger stimulus measures. Some have called for more support for the housing sector as distress among developers spills into other parts of the financial system and for measures to boost consumer spending.
According to a government adviser, who asked not to be named, Chinese central bankers’ priority is controlling risks, not boosting home sales. “The central government is well aware that the real estate sector will inevitably shrink,” the person said, adding that Beijing saw the adjustment as necessary over the long term as China continued to adjust its growth model away from property and infrastructure development to consumer services and high-tech manufacturing.
Liqian Ren, who manages China investments at US fund WisdomTree Asset Management, said Beijing believed expanding central government stimulus to the scale seen in the US in response to the 2008 financial crisis was likely to spark higher inflation and destabilise the renminbi. “The US is exceptional in being able to use fiscal stimulus without significantly impacting other areas,” she said, noting the US dollar’s status as a global reserve currency.
Economists’ hopes for deeper reforms in public spending — for instance boosting China’s pension and healthcare coverage to the point where people feel enough security to unlock massive household savings — have also been tempered since Xi made clear his aversion to European-style social welfare systems in 2021. In an article published in the Chinese Communisty party’s Qiushi journal, Xi warned of the limits to state support and of “falling into the trap of nurturing lazy people through ‘welfarism’”.
One key piece missing from the government response so far is an attempt to repair the administration’s relationship with private sector entrepreneurs. Andy Rothman, an investment strategist at the Matthews Asia fund, said while fears of impending economic doom were overblown, “the biggest problem” was that confidence among Chinese entrepreneurs had never recovered from Xi’s sweeping “common prosperity” campaign.
The policy, rolled out in 2021 in the name of reducing social inequality, also sought to reassert party control over the country’s billionaire class, whose influence had expanded through decades of economic growth. But the policy hammered confidence, wiped trillions of dollars from Chinese companies’ share prices and introduced an overwhelming sense of regulatory uncertainty.
“They need to believe that this over-regulatory effort is being rolled back, and that they’re now free to go about and do business and the government’s going to get out of their way,” Rothman said, noting that private sector entrepreneurs not only drove the most wealth creation and GDP growth in China but also employed most of the urban workforce.
The onset of such a complicated set of economic problems would foreshadow a challenge to the political authority of other world leaders, but experts noted that Xi’s grip on power remained unaffected.
Lance Gore, an expert on Chinese politics and economy at the National University of Singapore, said a deeper economic downturn would alarm Xi, who last year secured a precedent-breaking third five-year term as head of the party and military. The Chinese president has installed a leadership team synonymous with one quality above all else: loyalty.
Where once the 24-member politburo had a balance of economic experience and ideological leanings, Xi has stacked key positions with mostly trusted leaders with whom he has worked over decades and rising stars who have proven their trustworthiness and alignment with his own views. This means that despite last year’s protests over Xi’s coronavirus controls and record youth unemployment, none are likely to question Xi’s wisdom.
“The other part of the story is that during those years of rapid Chinese growth, the state lost no time to build up its [state security] machinery,” Gore said. “He would not like to use it, but it is available.”