According to Morgan Stanley analysts in a recent report, monetary tightening is now the number one challenge for the Chinese economy.
Since 2023, monetary tightening has been plaguing China. Currently, this phenomenon is showing signs of spiraling upward, threatening the outlook of the world’s second-largest economy and prompting calls from the outside world for Beijing to take immediate action.
On Monday (September 9), official data released by the Chinese Communist Party showed that in August, Chinese consumer prices rose by 0.6% year-on-year, with core CPI in China actually rising by 0.3% after excluding food and energy.
Another broader economic indicator representing price trends – the GDP deflator, which is the difference between nominal GDP growth and real GDP growth – indicates that China has been in a state of monetary tightening for five consecutive quarters.
Analysts from Bloomberg Economics and BNP Paribas, among other banks, have suggested that the GDP deflator may persist until 2025. This would mark the longest period of monetary tightening in China since data began in 1993.
The collapse of the real estate market has dragged down the entire Chinese economy. Real estate developers and related industries have cut back on investments. Historically, real estate has been the most important asset for wealth accumulation for families. As wallets tighten, not only has high-end consumption declined, but even essential consumption expenditures have been reduced.
Consumer confidence in China is currently at historically low levels, with households increasingly inclined towards saving rather than spending or buying homes. Reduced consumption leads to price declines, putting more pressure on corporate profits and wages.
Even more concerning is the possibility that monetary tightening could snowball, as households affected by shrinking wages may cut back on spending or delay purchases expecting further price drops. Business income will be impacted, inhibiting investment and leading to further pay cuts and layoffs, ultimately resulting in bankruptcies for both households and businesses.
Morgan Stanley analysts stated in a report that monetary tightening is now the top issue in China.
Private surveys cited by Bloomberg suggest that this situation is already unfolding. Surveys from Caixin Insight Group and a big data company revealed that in government-favored economic sectors such as electric vehicle manufacturing and renewable energy, starting salaries in August were nearly 10% lower than the peak in 2022.
A survey conducted by Cheung Kong Graduate School of Business with 300 company executives showed that the growth in labor costs in August was at its lowest level since the stringent “zero-covid” lockdown enforcement in April 2020.
Additional data from Zhaopin also indicated that in the second quarter, the average recruitment wages in 38 major cities remained virtually unchanged, while there was a 5% increase in the two years before the outbreak of the pandemic.
The Wall Street Journal noted that even if the Chinese Communist Party takes action, it may not steer the Chinese economy towards a more sustainable growth model, such as domestic consumption. For over a decade, foreign analysts and investment bank economists have been loudly advocating for this shift. However, achieving this requires structural reforms and fundamental shifts in thinking by Beijing.
In an article published in August, Michael Pettis, a finance professor at Peking University’s Guanghua School of Management, pointed out the dilemma that Beijing’s implementation of monetary expansion policies might still lead to monetary tightening as their policies primarily target the economic supply side.
Lynn Song, Chief Economist for Greater China at ING Bank NV, wrote in a report, “We are nearing the end of the third quarter, and against the backdrop of many unfavorable factors, the time for policymakers to introduce measures to boost the economy is running out.”