In April, the meeting of the Central Political Bureau of the Chinese Communist Party was expected to announce new and more effective policies to address China’s economic issues. However, what people saw at this meeting was just a rehash of existing policies, which so far have had little to no substantial impact on the Chinese economy.
Now, top leaders of the CCP have hinted at making more commitments at the Third Plenary Session in July. Given the lackluster performance of the CCP leadership so far, international observers are skeptical about whether more substantial policies will emerge in July, and it is understandable. The lack of effective policies has shown that the Chinese government either doesn’t know or fundamentally doesn’t know how to deal with the increasingly severe economic challenges.
It is well known that the Chinese economy continues to show signs of weakness. While there was some hope at the beginning of the year that the worst was over and economic activities were picking up, recent data has dashed those hopes. Purchasing Managers’ Index results indicate a slowdown in economic activity, hovering between growth and decline. Although it’s better than the sharp decline in 2023, it’s still not encouraging. Meanwhile, service industry data shows a comprehensive decline compared to the growth at the beginning of the year. Furthermore, industrial profits in the first quarter significantly dropped for both state-owned and private enterprises compared to the same period last year.
The ongoing real estate crisis continues to weigh down on property sales and the construction industry. According to data released by China Real Estate Information Corp (CRIC), the sales of the top 100 developers in the country dropped by about 43% compared to the same period last year, with a 13% decline just since March, an 80% drop from December 2020 before the real estate crisis erupted. While exports have seen some growth, it is more attributed to the devaluation of the renminbi, giving China a temporary advantage in some technically simple and low-cost products compared to its competitors, something the CCP leadership did not intend to push forward.
Facing these distressing economic news, the CCP’s top leadership in Beijing can only offer some inadequate simple measures; and worse, they only vaguely promise to take more effective actions. At the National People’s Congress in March, the CCP leadership discussed some measures such as lowering interest rates through the People’s Bank of China and introducing a plan called “white lists,” where local governments identify stalled development projects for special financing by state-owned banks after review.
The CCP leadership also talked about issuing national bonds to alleviate the debt pressure of local governments, and issuing bonds has been Beijing’s tried and true catch-all measure. This suggests that more substantial policy measures would be announced at the political bureau meeting in late April. However, what emerged at the political bureau meeting was a reiteration of these three measures and vague promises of more measures soon.
Indeed, the introduction of the “white lists” plan by the CCP leadership has some merit. However, the minimal actual involvement of the CCP government so far makes it challenging to meet industry needs. Currently, government funds account for only 5% of the total amount of failed cases announced by the Evergrande Group in 2021, not to mention the subsequent years’ failures by other real estate developers like another real estate giant, Country Garden, facing financial crises. Unless the scale of funds involved in the “white lists” plan significantly expands, the plan, rather than being a policy, is more of a show put on by CCP meetings to talk about capital, not to mention as a remedial measure for the real estate crisis. Similarly, although the issuance of bonds by the CCP amounts to a whopping 1 trillion yuan (approximately $140 billion), it can only have a certain restraining effect on the estimated up to $1.1 trillion local government debt.
It’s worth noting that the rate cuts by the People’s Bank of China have been minimal. So far, the People’s Bank of China has cut interest rates five times, with a total decrease of not even half a percentage point. Even under the most optimistic scenario, it is challenging to expect such a minimal measure to uplift the economy, which is undeniably in much worse shape now. During the rate cuts by the People’s Bank of China, China’s moderate annual inflation of about 2% has turned into mild deflation of about 0.8% per year.
Considering the impact of this shift on borrowing and purchasing power, China’s real interest rates have actually risen, which not only failed to stimulate but also hindered residents’ borrowing and spending capacities. To maintain the stimulating mechanism initiated by the rate cuts, the People’s Bank of China would need to reduce rates by 2.8 percentage points. There is still much work to be done by the CCP central bank to encourage borrowing and spending by the public.
Apart from these cosmetic policy postures, the CCP regime has only made empty promises. The Political Bureau informed the public that they will soon explain various policies for “digesting” the large number of unsold housing stocks in the country. Without a doubt, this will be a mammoth and arduous task as most of these properties are located in places ordinary Chinese people are unwilling to reside. However, so far, the Chinese government has only indicated that it is working to address this issue. The CCP leadership also promised to formulate a “thorough” plan to tackle the excessive debts of local governments to deputies and members of the National People’s Congress and the Chinese People’s Political Consultative Conference. Yet, to this day, no one has heard any details about this plan.
Some speculate that these new policies will be unveiled at the anticipated Third Plenary Session of the CCP to be held this year in July. While there may be some new policies announced then, the likelihood of China rolling out the significant policy shifts needed to address the economic challenges remains slim, judging from the CCP leadership’s track record. Moreover, even the certainty of the Third Plenary Session taking place as scheduled is unknown, as there are variables at play. The CCP’s governing charter requires at least one plenary session being held annually, yet it has been 17 months since the last session, the longest gap since the rule of the first generation CCP leader Mao Zedong. Clearly, the CCP and the national leadership are still in a state of perplexity about how to tackle this severe economic challenge.
If the Third Plenary Session of the CCP occurs as planned, and if the CCP leadership announces robust economic rescue policies, the national economy may start to recover. However, these are just two significant “ifs.” It is more likely that the recent economic downturn will continue under massive inertia, leading the Chinese economy into troubled waters in the foreseeable future.