China’s economy is facing a real estate recession, a stock market downturn and deflation. Kevin Frayer/Getty
Currently, deflation, an aging population, real estate turmoil and the stock market are causing problems for China’s economy.
Some economists believe Beijing is still capable of providing economic stimulus in 2024.
But a lack of political support could lead to a “debt deflationary spiral.”
This is a machine translation of an article from our US colleagues at Business Insider. It was automatically translated and checked by an editor.
China’s economy has emerged from the pandemic far more slowly than most analysts expected. If political leadership does not intervene sufficiently in 2024 to support the economy, a “debt-deflation spiral” could occur.
Currently, deflation, an aging population, real estate turmoil and an overly bearish narrative about Chinese stocks are weighing on the country’s economy. While some economists and Wall Street strategists have expressed skepticism to Business Insider about Beijing’s chances of an upswing, researchers at the Institute of International Finance are more optimistic.
Read too
China’s real estate giant Evergrande is being dissolved: these are the consequences of the court ruling
Gene Ma and Phoebe Feng said in a report from the International Institute of Finance (IFF) on Monday that they maintained their growth forecast of 5 percent for China this year, above the consensus estimate of 4.6 percent. However, this depends on an appropriate political response from those responsible in Beijing.
Deflation and falling stocks
According to the researchers, the Chinese leadership has failed to get a handle on the one-sided dynamics of supply and demand. Housing supply and production capacity have exceeded domestic demand, and key consumer price and growth indicators have all turned negative in the fourth quarter of 2023.
“The deflation means that the PPI-adjusted [Producer Price Index, dt. „Erzeugerpreisindex“; Anm. d. Red.] “The real lending rate remained elevated in 2023 and lending conditions tightened despite moderate monetary easing,” said Ma and Feng.
Meanwhile, deflation has hit corporate profits and stock prices in China, as well as wage growth and tax revenues. The CSI 300 Index was one of the world‘s worst-performing equity benchmarks last year. Meanwhile, China’s 2023 export price index fell nine percent as export growth slowed. Nominal GDP grew by 4.6 percent in 2023, 0.6 points below real growth.
Read too
Bundesbank warns: Germany can hardly cope economically with a decoupling from China
Real interest rates are high amid deflation IIF
However, Beijing has the flexibility to stimulate demand through monetary and fiscal policy adjustments.
For example, banks could lower interest rates on new loans to encourage borrowing, and the People’s Bank of China could expand its lending programs, the IIF said.
The recession in the real estate sector
China’s real estate market now accounts for a smaller share of the economy, and Beijing appears to have come to terms with the fact that it can no longer rely on property values to drive growth as it once did.
Since peaking in 2021, home sales and housing starts in China have plunged 45 percent and 59 percent, respectively. However, the IIF expects policymakers to halt these declines this year. Then the sector would no longer place such a heavy burden on the economy.
“Annual growth rates in housing construction will still be negative in 2024, but will be less severe than in the past two years, thus representing a relatively smaller drag on growth,” said Ma and Feng. “A stabilization of housing construction and the healing of Covid scars should further boost household consumption in 2024. The expansionary fiscal and monetary policy stance will promote investment.”
The housing market is in a deep recession. Haver, IIF
The IIF maintains its optimistic growth forecast for China for the coming year. But the team acknowledged that there remain many risks given Beijing’s recent policy mistakes.
“It may take longer than expected to recover from the deep housing crisis,” Ma and Feng said. They added that the downturn in the real estate and stock markets could potentially hit household wealth and consumption more than feared in the coming months.
Read too
China’s economy is doing better than most people think, says a former Chinese central bank adviser
If politicians fail to act, deflation expectations could become more entrenched and further weigh on domestic demand and foreign investment, according to the researchers.
“Given threats such as policy mistakes, deflationary expectations and trade tensions,” the researchers said, “the economy could enter a debt-deflationary spiral without adequate policy support.”
External content not available
Your privacy settings prevent the loading and display of all external content (e.g. graphics, tables, subscription login) and social networks (e.g. Youtube, Twitter, Facebook, Instagram etc.). To display this, please activate the settings in the privacy settings.
Change privacy settings