Abstract: This article highlights key aspects of China's current economic situation: reduced household spending, early debt repayment, business disparities, increased local government debt risks, ongoing real estate market challenges, external sector instability, and potential supply-demand issues. It also notes stable employment but structural imbalances. The article suggests solutions such as using targeted monetary policy, promoting urbanization, stimulating consumer demand, and implementing a peak-load electricity pricing system for summer.
It's important to be patient and confident, as China's economy is still recovering from the pandemic. As the balance sheets of economic entities get better, residents will spend more, boosting income and consumption. If you look around the globe, you will find that consumption recovery takes time, typically a year, but China has only been recovering for six months. Of course, you have to be aware that the economy has slowed down since the second quarter, with manufacturing PMI in a contraction phase for three consecutive months, and there's a lack of domestic economic momentum and market confidence. I would suggest moderate policy adjustments to support domestic demand and reach the 5% growth target for the year.
The current economy has a few key aspects:
1.People are cautious with spending, preferring to save and reduce debt. Retail sales growth in April and May averaged 2.6% and 2.5% over two years, significantly lower than the pre-pandemic level of around 8%. Many people expect their income to decrease and are becoming more cautious with their money. They are saving more and reducing their debts. In the first five months, a large portion of new deposits went into time deposits, making up 90% of the total M2 money supply, which is 13% higher than the same period last year. Some individuals are also paying off their home loans early, as they aim to keep their debts as low as possible.
2.Businesses vary in performance. This year, most new loans have gone to state-owned companies and the tech innovation sector. While clean energy is growing fast, it's not a big part of the economy. Different from before, real estate isn't boosting the economy much. Private investment decreased by 0.1% in the past five months, and the confidence of private and small businesses, which contribute significantly to GDP and employment, needs a boost.
3.Local governments face increased debt risks. Due to the impact of the pandemic and real estate adjustments, there are significant fiscal challenges. Local government debts, especially those related to urban development, have reached a peak. The chain of "land revenue→infrastructure investment" is difficult to sustain because project returns are low, and debt repayment capacity is weak, which, in turn, limits the ability of local governments to invest and make progress.
4.The real estate market still poses risks. After a brief improvement in the first quarter, it's going downhill again. Investment in real estate development dropped by 7.2% in the first five months, and sales of new homes fell by 0.9%. Real estate companies are still struggling to get financing, and there's a shortage of cash. In the long run, due to factors like slower urbanization and an aging population, the overall demand for buying homes may decrease.
5.Foreign economies are unstable, and this, along with weak domestic demand, could be a problem. The U.S. interest rates might stay high for a while, their economy and financial risks are increasing, and the global economy is slowing down. Weak demand from abroad is a big challenge for China in keeping its foreign trade and demand stable.
6.There is no sign of falling prices, but we need to watch the balance of supply and demand. Deflation is often accompanied by shrinking demand, but in China, demand is increasing, and there is fast growth in money and credit. In June, CPI stayed the same compared to last year, and PPI dropped by 5.4%. As the base goes down and the economy gains momentum, the average CPI is expected to rise slightly, and the PPI might go up in Q4.
7.Employment is mostly steady, but there are significant structural challenges. As AI replaces certain jobs that involve intellectual work, we may have a long-term structural mismatch between labor supply and demand.
8.The monetary policy is being adjusted counter-cyclically to help stabilize the overall economy. In the first half of this year, financial institutions provided an additional 15.7 trillion yuan in loans, an increase of 2 trillion yuan from the previous year. Financing costs are stable with a slight decrease, and the average interest rate on corporate loans in the first five months was 3.96%, down by 0.39 percentage points compared to the previous year. In June, the central bank further lowered policy rates by ten basis points, which influenced a simultaneous decrease in loan market rates.
9.Affected by factors such as the strong U.S. dollar and concentrated domestic foreign exchange purchases during the summer, the Chinese yuan weakened, but there has been some recent recovery.
Given the challenges analyzed, here are some suggestions:
1.Use structural monetary policies to support inelastic demand as well as demand for upgraded housing. Low rental-to-purchase ratios are a major obstacle to sustaining affordable housing. Normally, affordable housing needs a rental-to-purchase ratio of 3%-4% for financial viability, but the current ratio is around 1%-1.5%. To address this, the PBC has introduced a plan to support loans for rental housing, providing low-cost funds with an interest rate subsidy of over 1%. When combined with financial support from local governments, this can encourage local governments to acquire existing housing and increase the availability of affordable rental housing. This plan is currently being tested in eight cities.
2.Reform household registration to promote urbanization and release consumption potential. According to some scholars, the household registration reform can increase migrant workers' and new citizens' consumption willingness by 23%. To that end, better protection for migrant workers in housing, medical care, children's education, social security, and other areas while working in cities is required. At the same time, we must focus on maintaining a certain level of labor mobility between urban and rural areas, cities, and East and West. This is also an embedded Chinese economy stabilizer.
3.A peak electricity tariff system for summer peaks can be established and handed over to provincial-level local governments for implementation so that electricity prices can be appropriately increased during peak periods of electricity consumption. China's electricity consumption ranks first in the world, reaching 8.6 trillion kilowatt-hours in 2022, more than twice that of the United States (4.1 trillion kilowatt-hours); per capita electricity consumption is about 6,100 kilowatt-hours/year, which is nearly twice as much as the global per capita level (3,200 kilowatt-hours/year). However, China’s electricity prices are at the lowest level in the world, and domestic electricity resources are wasted quite seriously. The brightness of satellite images of nighttime lights in some areas has exceeded that of major European and American metropolitan areas. The price mechanism is one of the more effective policy mechanisms. Consider taking advantage of the current window period of low prices to appropriately increase peak electricity prices in the summer to maximize the relief from the pressure of power cuts. At the same time, it can also promote carbon emission reduction from the demand side and help achieve the goal of carbon peak and carbon neutrality.
This article was first published on the CPPCC Daily on September 19th. It is translated by CF40 and has not been reviewed by the author. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
