China’s economy is on course for a “double dip”

The post-covid economy was meant to roar. But it is faltering again.

Jun 18th 2023 | Hong Kong


short summarize(248 Words)

China's economy has experienced unexpected changes in recent months, with unexpected growth and unexpected slowdowns. The economy initially grew faster than expected due to the country's exit from COVID-19 controls, but then recovered more slowly in April and May. The unemployment rate among China's urban youth reached 20%, the highest since data were first recorded in 2018. China has also failed to become an inflationary force in the world economy, with increased demand for oil and steel and copper becoming cheaper. The slowdown can be attributed to China's property market, which seemed to be recovering from a disastrous spell of defaults, plummeting sales, and mortgage boycotts.

However, property sales have fallen back to 70% of their level in 2019, and housing starts are only about 40% of their level then. The government's growth target for this year is around 5%, but policymakers seem unperturbed by falling prices. The People's Bank of China (PBOC) has asked lenders to lower their deposit rates, paving the way for further cuts in interest rates. However, the slowdown in the second quarter will be a "hiccup" as employment in China's service sector began 30 million short of where it would have been without COVID. If monetary easing fails, the government will have to explore fiscal stimulus.

The central government may use stimulus measures like pensions, consumer giveaways, and high-tech consumer handouts to boost the economy. However, fiscal authorities view these handouts as frivolous and prefer durable assets like green infrastructure and intercity transport.

full text(1340 Words)


CHINA PRIDES itself on firm, unswerving leadership and stable economic growth. That should make its fortunes easy to predict. But in recent months, the world’s second-biggest economy has been full of surprises, wrong-footing seasoned China-watchers and savvy investors alike.

Early this year, for example, China’s economy grew faster than expected, thanks to the country’s abrupt exit from covid-19 controls. Then, in April and May, the opposite happened: the economy recovered more slowly than hoped. Figures for retail sales, investment and property sales all fell short of expectations. The unemployment rate among China’s urban youth passed 20%, the highest since data were
first recorded in 2018. Some now think the economy might not grow at all in the second quarter, compared with the first. By China’s standards this would be a “double dip”, says Ting Lu of Nomura, a bank.


China has also defied a third prediction. It has failed, thankfully, to become an inflationary force in the world economy. Its increased demand for oil this year has not prevented the cost of Brent crude, the global benchmark, from falling by more than 10% from its January peak. Steel and copper have also got cheaper. China’s producer prices—those charged at the factory gate—declined by more than 4% in May compared with a year earlier. And the yuan has weakened. The price Americans pay for imports from China fell by 2% in May compared with a year earlier, according to America’s Bureau of Labor Statistics.

Much of the slowdown can be traced to China’s property market. Earlier in the year, it seemed to be recovering from a disastrous spell of defaults, plummeting sales, and mortgage boycotts. The government had made it easier for indebted property developers to raise money so that they could complete delayed construction projects. Households that refrained from buying last year, when China was subject to sudden lockdowns, returned to the market in the first months of 2023 to make the purchases they had postponed. Some analysts even allowed themselves the luxury of worrying about whether the property market might bounce back too strongly, reviving the speculative momentum of the past.

Yet this pent-up demand seems to have petered out. The price of new homes fell in May compared with the previous month, according to an index from Goldman Sachs, a bank. Although property developers are keen to complete building projects, they are reluctant to start them. Gavekal Dragonomics, a consultancy, calculates that property sales have fallen back to 70% of the level they were at in the same period of 2019, China’s last relatively normal year. Housing starts are only about 40% of their level then (see chart on next page).

How should the government respond? For a worrying few weeks, policymakers looked as though they might not do much at all. The official growth target for this year—around 5%—lacks ambition. Beijing seemed keen to keep a lid on the debts of local governments, which are often urged to splurge for the sake of growth. The People’s Bank of China (PBOC), the central bank, seemed unperturbed by falling prices. It may have also worried that a cut in interest rates would put too much of a squeeze on banks’ margins because the interest rate they pay on deposits might not fall as far as the rate they charge on loans.

But on June 6th, the PBOC asked the country’s biggest lenders to lower their deposit rates, paving the way for the central bank to reduce its policy rate by 0.1 percentage points on June 13th. The interest rate banks charge their “prime” customers then fell in tandem, which will further lower mortgage rates. Although the cut was negligible, it showed the government was not oblivious to the danger. A meeting of the State Council, China’s cabinet, on June 16th dropped hints of more to come.


Robin Xing of Morgan Stanley, a bank, expects further cuts in interest rates. He also thinks restrictions on home purchases in first- and second-tier cities may be relaxed. The country’s “policy banks” may provide more loans for infrastructure. Local governments may be allowed to issue more bonds. China’s budget suggests it expected land sales to stay steady in 2023. Instead, revenues have so far fallen by about 20%. If the shortfall persists for the entire year, it would deprive local governments of more than 1 trillion yuan ($140 billion) in revenue, Mr. Xing points out. The central government may feel obliged to fill that gap.

Will this be enough to meet the government’s growth target? Mr. Xing thinks so. The slowdown in the second quarter will be no more than a “hiccup,” he argues. Employment in China’s service sector began this year 30 million short of where it would have been without COVID, Mr. Xing calculates. The rebound in “contact-intensive” services, such as restaurants, should restore 16 million of those jobs over the next 12 months. When jobs do return, income and spending will revive. Another 10 million of the missing jobs are in industries like e-commerce and education that suffered from a regulatory storm in 2021. China has struck a softer tone towards these firms in recent months, which may embolden some of them to resume hiring as the economy recovers.

Other economists are less optimistic. Xu Gao of Bank of China International argues that further monetary easing will not work. The demand for loans is insensitive to interest rates, now that two of the economy’s biggest borrowers—property developers and local governments—are hamstrung by debt. The authorities cut interest rates more out of resignation than hope.

He may be right. But it is odd to assume monetary easing will not work before it has really been tried. Loan demand is not the only channel by which it can revive the economy. Zhang Bin of the Chinese Academy of Social Sciences and his co-authors estimate that if the central bank’s policy rate dropped by two percentage points, it would cut interest payments by 7.1 trillion yuan, increase the value of the stock market by 13.6 trillion yuan, and lift house prices, bolstering the confidence of homeowners.

If monetary easing does not work, the government will have to explore fiscal stimulus. Last year, local-government financing vehicles (LGFVs), quasi-commercial entities backed by the state, increased their investment spending to prop up growth. That has left many strapped for cash. According to a recent survey of 2,892 of these vehicles by the Rhodium Group, a research firm, only 567 had enough cash on hand to meet their short-term debt obligations. In two cities, Lanzhou, the capital of Gansu province, and Guilin, a southern city famous for its picturesque Karst mountains, interest payments by LGFVs rose to over 100% of the city’s “fiscal capacity” (defined as their fiscal revenues plus net cash flows from their financing vehicles). Their debt mountains are not a pretty picture.

If the economy needs more of a push, the central government will have to engineer it. In principle, this stimulus could include extra spending on pensions and consumer giveaways. The government has, for example, extended tax breaks on electric vehicles that have helped boost car sales.

Officials could also experiment with high-tech consumer handouts of the kind pioneered by cities in Zhejiang province during the early days of COVID. They distributed millions of coupons through e-wallets, which would, for example, knock 70 yuan off a restaurant meal if the coupon holder spent at least 210 yuan in a week. According to Zhenhua Li of Ant Group Research Institute and co-authors, these coupons packed a punch. They induced more than three yuan of out-of-pocket spending for every one yuan of public money.

Unfortunately, China’s fiscal authorities still seem to view such handouts as frivolous or profligate. If the government is going to spend or lend, it wants to create a durable asset for its trouble. In practice, any fiscal push is therefore likely to entail more investment in green infrastructure, intercity transport, and other public assets favored in China’s five-year plan. That would be an utterly unsurprising response to China’s year of surprises.

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中国自豪于坚定不移的领导地位和稳定的经济增长。 这将使他们的财富容易预测。 但近几个月来,世界第二大经济体充满了惊喜,有经验的中国观察者和聪明的投资者都错了脚。

例如,今年早些时候,中国经济增长速度超过预期,这得益于该国突然退出COVID-19控制。 然后,在4月和5月,发生了相反的事情:经济复苏比预期更缓慢。 零售、投资和房地产销售的数据都低于预期。 中国城市青年失业率超过20%,这是自数据发布以来最高的数字。
2018年首次录制。 一些人现在认为,与第一季度相比,第二季度经济可能根本不会增长。 根据中国的标准,这将是一个“双滴”,Nomura银行的Ting Lu说。

中国也挑战了第三个预测。 幸运的是,它未能成为世界经济中的通货膨胀力量。 今年对石油的需求增加并未阻止全球基准布伦特原油的成本从1月份峰值下降超过10%。 钢铁和铜也变得更便宜。 中国的生产者价格 - 那些在工厂门口收费 - 去年5月比一年前下降了4%以上。 黄金已经削弱了。 据美国劳工统计局(Bureau of Labor Statistics)称,美国人从中国进口的价格在今年5月与前一年相比下降了2%。

放缓的很大一部分可以追溯到中国房地产市场。 今年早些时候,它似乎正在从一个灾难性的违约魔法,销售下降和抵押贷款抵制中恢复过来。 政府已经使负债的房地产开发商更容易筹集资金,以便他们可以完成延迟的建筑项目。 去年,当中国遭到突然封锁时,拒绝购买的家庭在2023年初返回市场,以进行他们推迟的购买。 一些分析师甚至允许自己担心房地产市场是否会过度反弹,重振过去的投机势头。

然而,这种的需求似乎已经消失了。 与上个月相比,新房价在5月份下降,根据银行高盛的指数。 尽管房地产开发人员热衷于完成建筑项目,但他们不愿开始。 咨询公司Gavekal Dragonomics估计,房地产销售量已下降至2019年同期水平的70%,这是中国最后一个相对正常的年份。 房屋开始只有大约40%的水平当时 (see chart on next page).

政府应该如何回应? 在令人担忧的几周里,决策者看起来好像根本做不到很多事情。 今年官方的增长目标(约5%),缺乏雄心勃勃。 北京似乎渴望保住地方政府的债务,这些地方政府经常被敦促为了增长而清除债务。 中央银行中国人民银行(PBOC)似乎没有受到价格下跌的干扰。 它也可能担心,降低利率会对银行的利率造成太大的压缩,因为他们支付存款的利息可能不会下降,而不是他们对贷款的收费率。

但6月6日,PBOC要求该国最大的贷款方降低存款利率,为中央银行在6月13日降低政策利率为0.1个百分点铺平了道路。 银行收取“优惠”客户的利率随后下降,这将进一步降低抵押贷款利率。 虽然削减是微不足道的,但它表明政府没有忽视这种危险。 中国内阁国务院6月16日的一次会议引发了更多未来的迹象。

摩根斯坦利(Morgan Stanley)银行的罗宾·辛(Robin Xing)预计进一步降低利率。 他还认为,在一级和二级城市购买房屋的限制可能会放松。 该国的“政策银行”可能会为基础设施提供更多的贷款。 地方政府可能会发行更多的债券。 中国的预算表明,预计2023年土地销售将保持稳定。 相反,收入到目前为止已经下降了约20%。 如果赤字持续一整年,将剥夺地方政府超过1万亿元(140亿美元)的收入。 Xing指出。 中央政府可能觉得有义务填补这一差距。

这足以实现政府的增长目标吗? Mr. Xing这样认为。 第二季度的放缓将不仅仅是“跳跃”,他说。 今年,中国服务业的就业率低于在没有COVID的情况下达到3000万。 Xing 计算 “接触密集型”服务的回升,如餐厅,预计将在未来12个月内恢复1600万个工作岗位。 当工作回来时,收入和支出将复苏。另有1000万工作岗位失踪的是电子商务和教育等行业,这些行业在2021年遭受了监管风暴。 近几个月来,中国对这些公司采取了温和的态度,这可能会鼓励一些公司在经济复苏时恢复招聘。

其他经济学家则不那么乐观。 中国国际银行(Bank of China International)的 Xu Gao认为,进一步的货币宽松不会起作用。 对贷款的需求对利率不敏感,现在经济最大的两个借款人 - 房地产开发商和地方政府 - 被债务困扰。 当局因为辞职而降低利率,而不是希望。

他也许是对的。 但奇怪的是,假设货币宽松在真正尝试之前不会起作用。 贷款需求并非它可以恢复经济的唯一渠道。 中国社会科学院的张本和他的共同作者估计,如果中央银行的政策利率下降2个百分点,将削减利息支付71万亿元,增加股市价值136万亿人民币,提高房价,增强房东的信心。

如果货币宽松不起作用,政府将不得不探索财政刺激措施。 去年,地方政府融资车辆(LGFVs),由国家支持的半商业实体,增加了投资支出,以支持增长。 这让许多人陷入了现金困境。 根据研究公司Rhodium Group最近对2892辆这些车辆的调查,只有567辆有足够的现金来履行短期债务义务。 在两座城市,杭州省的首都兰州和南部城市吉林,以其风景如画的卡斯特山脉而闻名,LGFV的利息支付高达该市“税收能力”的100%以上。 (defined as their fiscal revenues plus net cash flows from their financing vehicles). 他们的债务山不是一个漂亮的画面。

如果经济需要更多的推动,中央政府将不得不工程它。 原则上,这种激励措施可能包括对养老金和消费者捐款的额外支出。 例如,政府延长了对电动汽车的减税措施,这有助于推动汽车销量。

官员还可以尝试使用高科技消费品,这类产品是浙江省城市在COVID早期开创的。 他们通过电子钱包分发了数以百万计的折扣券,例如,如果折扣卡持有人在一周内花费至少210元,那么餐厅的饭菜将被折扣70元。 根據 Ant Group 研究所的 Zhenhua Li 和共同作者說,這些折扣包裝了一個打擊。 他们诱导了超过三元的口袋外支出,为每一元的公共资金。

不幸的是,中国财政当局似乎仍然认为这种做法是无情的或粗鲁的。 如果政府要花钱或借钱,它想为自己的麻烦创造一个持久的资产。 实际上,任何财政推动都可能导致更多投资于绿色基础设施、城市间交通和中国五年计划所优惠的其他公共资产。 这将是对中国惊喜的一年完全毫不意外的回应。


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