Daily Management Review

China's Weakening Economy Cannot Be Fixed Painlessly


China's Weakening Economy Cannot Be Fixed Painlessly
Erin Yao wishes to learn street dance and travel, two things she was unable to accomplish in China for three years because to COVID-19 limitations.
She is saving more of her income than she did during the pandemic, when she felt driven to stock up on essentials, contrary to what many economists had predicted consumers would do once China eased those limitations.
"I would ask myself if I have enough savings for treating an unexpected illness. If I lose my job, do I have enough money to sustain myself until I find a new one?" said the 30-year-old book editor.
Yao's reluctance to spend is the product of an economic growth strategy from the 1980s that many claim depended excessively on investments in real estate, infrastructure, and industry and insufficiently on enabling consumers to earn and purchase more.
Although rebalancing has become more urgent as a result of the No. 2 economy in the world's growth slowdown, moving economic resources to families would necessitate tough choices that would increase short-term suffering.
In example, increasing the percentage of households in the national income would result in a decrease in the contribution of other sectors, such as the government or corporations, particularly China's expanding industries.
"Their fall will make a recession unavoidable," said Juan Orts, China economist at Fathom Consulting.
"We think that this is a price that Beijing is not willing to pay," said Orts, who sees China heading towards "Japanification," which refers to Tokyo's "lost decades" of economic stagnation since the 1990s.
Yao might theoretically spend more if she found a job paying more than her 8,000 yuan ($1,097) monthly wage, which, per the employment website Glassdoor, is less than a quarter of what book editors make in the United States.
However, youth unemployment in China is at historic highs of over 21%, indicating a dismal employment environment.
80% of new urban jobs are in the private sector, which is still rebounding from regulatory crackdowns on the tech and other industries.
Although policymakers have promised to increase financing to businesses, weak domestic demand ultimately limits company growth.
Dealing with the vulnerabilities of people like Yao is another approach to encourage spending. To rebalance the economy, many economists have urged China to expand its social safety net.
Yao resides in Beijing, where three to 24 month unemployment benefits can be worth up to 2,233 yuan per month, which is just a little bit less than the rent she pays for her 12 square metre flat.
Her parents are elderly and reside in a remote area of China. Once they retire, each parent will be eligible for a modest annual pension of up to 1,500 yuan.
Yao pays 300 yuan per month for her father's medications, which is equivalent to the price of one dancing lesson.
"If the public medical insurance covered more expenses for the elderly, I would feel more secure," Yao said.
She continued, saying that she is also deterred from starting a family by financial instability. Particularly in the 20–40 age range, which is when people typically reach the pinnacle of their lifetime spending, China's population is ageing and declining.
Following recommendations from a crucial Communist Party leadership meeting, numerous government ministries have announced hundreds of initiatives to increase consumption during the past month.
Subsidies for automobiles and household appliances, longer restaurant hours, and the promotion of leisure and tourism-related activities are a few examples.
Yao was unmoved and preferred the consumer vouchers that some local governments in China had distributed, but in quantities that were too tiny to have an impact on society as a whole.
Businesses share this lack of enthusiasm.
"We haven't really seen anything in terms of really boosting demand," said Jens Eskelund, President of the European Chamber of Commerce in China, adding "that would be more important than supporting the supply side."
Owner of a catering company in the Chinese island of Hainan Wang Jiliu, 45, claims revenue is falling in part due to the fact that people's earnings haven't increased significantly since the pandemic.
Her own spending patterns are being impacted by this in turn.
"I think in the same way: I will also control my desire to shop," Wang said. "In the past, we used to eat out and travel, which we don't do much anymore."
Economists' suggestions for demand-side policies include making public services better and more publicly accessible, increasing social benefits, giving workers greater negotiating power, or distributing shares of state-owned companies to the general public.
Who pays, though? An additional hindrance to business growth and employment would be higher welfare contributions, for example. The only remaining sector is government, which is experiencing a municipal debt crisis.
While short on cash, local governments are wealthy in assets. State-owned businesses with non-financial assets had net assets of 76.6 trillion yuan in 2021.
According to Michael Pettis, senior scholar at Carnegie China, China could maintain its present growth if Beijing required local governments to give households a transfer of 1–1.5% of GDP.
"The wealth and power of local government, business and financial elites often depend on control of those assets," he said.
"One of the really big conflicts is likely to be between Beijing and the local governments over how to allocate the various adjustment costs. That will become one of the most contentious political issues over the next two years."