Moderate softness: China will support its economy for the first time in 14 years
China has pledged to ease monetary policy next year for the first time in 14 years. In parallel, the CCP is planning additional financial stimulus to the economy through fiscal policy. This combination of measures supporting the economy is aimed at ensuring high GDP growth in 2025 and beyond. Izvestia reports on why the Chinese authorities, which are usually cautious and wait-and-see when it comes to government support, have now become more active and what this means for the rest of the world.
Refusal of restraint
The CPC Politburo - the country's highest 24-member body - this week announced a shift to a "moderately soft" monetary policy next year. No doubt the People's Bank of China will heed that recommendation. In the Chinese tradition, there are five positions of the government and the central bank on the MPC: "soft", "moderately soft", "restrained", "moderately tight" and "tight". Since 2010, the financial authorities have remained committed to "restrained" policies immediately after a period of easing due to the 2008-2009 crisis. They were not shaken even by the pandemic, which brought the country's GDP growth down to zero for the first time in decades.
What has changed now? The recovery of the Chinese economy after the pandemic is turning out to be worse than expected. It is enough to look at such an indicator as retail sales. Almost all the year they showed figures in the neighborhood or slightly above 3%. Only in November it accelerated to 4.8%. This is significantly below the GDP growth rate and shows that domestic consumption, on which the Chinese Communist Party was going to bet, still does not produce the necessary indicators.
Big problems in the real estate market. Prices continue to fall, with supply noticeably outstripping demand. This is despite the fact that the amount of new construction is down 63% from its peak in 2021. Construction investment is collapsing by more than 10% year-over-year on top of a comparable decline a year earlier. This drawdown is one of the deepest in history. Even in the US during the 2007-2009 mortgage crisis, things were not this bad. At the same time, the authorities are defiantly refusing any direct support for the housing market. The Chinese, for their part, are also in no hurry to spend their saved money on houses and apartments.
All this adds up to an unpleasant overall picture of deflation. While the rest of the world is somehow recovering from the consequences of the price explosion in 2021-2023, the situation in China is the opposite. Price growth since the beginning of the year is balancing around zero. Deflation may be a symptom of even more unpleasant problems than rapid price growth. In particular, because it supports already conservative consumer habits of citizens (why spend if everything will be even cheaper in a week/month/year), forming a vicious circle. Overcoming deflation can sometimes take decades. Especially in China's demographics, where the number of old people, who in principle spend less than young people, is growing rapidly.
Tariff woes
One of the few bright spots in the national economy is still exports. In November, shipments abroad were up 6.7% on the same month last year. With the US, the trade surplus increased slightly, and for the year as a whole, it may reach about $400 billion to the great displeasure of Washington. The problem is that, for one thing, China's export orientation has its limits. The world is too small for a huge China to fully fuel its economic growth through overseas trade. But more important right now is that the PRC is on the eve of a trade war.
U.S. President-elect Donald Trump has already said he plans to impose stiff import duties of 60% against all Chinese goods. For many items, these are essentially prohibitive duties. And this is on top of the already existing tariffs for Chinese goods in the US. We are talking about losing a huge share of the U.S. market. Exports under this scenario could end up in negative territory.
Therefore, it will probably be possible to reach 5% GDP growth per year in 2024. There is much less certainty about 2025. The structural problems of the Chinese economy will be superimposed on the extremely negative external environment. The Chinese government does not want to sit idle in the current situation, because the effect of a sharp slowdown in economic growth, or even a recession, will be devastating for the entire Chinese society.
On the fiscal front, the Chinese have started to take measures already in the past months. Thus, in November, a plan to support provinces and municipalities for a total of 10 trillion yuan was announced. At the same time, this is not a direct distribution of money, but rather measures to alleviate the debt burden. It is the huge debts of local governments, which are the key drivers of development in the country, that threaten to exacerbate economic problems, including a decline in aggregate demand. Still, this is somewhat less than Chinese businesses and analysts expected.
Delighted the whole world
Now we are talking about a likely rate cut, some variant of "quantitative easing" and a direct injection of money into the financial system (about a trillion yuan to start with). The Politburo called this tactic the principle of striving for progress while supporting stability. It also implies additional fiscal policy measures, i.e. new ways of stimulating. The forms of this stimulus will be determined in the coming weeks and months. It is unlikely that there will be a direct distribution of "helicopter money" in the image of the US in 2020, but the situation is not that acute yet.
Chinese stock indices reacted enthusiastically to the news of the monetary turnaround, jumping more than 3% on the day. In case the measures are precisely calibrated, it will be a great relief for the entire Chinese economy. Beijing fears a repeat of the Japanese scenario of the 1990s, when under similar conditions insufficiently decisive steps by the government led to three decades of economic stagnation. In addition, China, unlike Japan, has not yet escaped the "middle-income trap": its GDP per capita is only $13,000 - many times less than that of its most developed neighbors.
As for the rest of the world, there are plenty of reasons to rejoice. China is a key consumer of a huge amount of raw materials and a significant range of intermediate products and finished goods. It is the second most important market in the world, and, unlike the US and the EU, it is in no hurry to restrict access to it with tariffs.
Statistics on gas and oil consumption are particularly important for Russia. While the former will grow in any case, the black gold is not so clear-cut. Recently, the number of electric car sales in China for the first time exceeded 50% in a month. This means that Chinese demand for oil will grow slower than before in the foreseeable future. If this is compounded by the economic downturn, the global oil market is in for quite a shock. Measures to support the economy may take this scenario off the agenda, at least for the next two to three years.
