In a recent opinion piece in The Wall Street Journal, Joseph Sternberg raised a sharp question that while the world is distracted by economic and political turmoil elsewhere, China’s economic crisis is deepening without much attention from the outside world.
The official Purchasing Managers’ Index (PMI) survey for September released by the Chinese government this week indicates that various industries are still in a contraction phase. This survey reflects the sentiment of large state-owned enterprises that are driving the Chinese economy. Another PMI survey that includes more small and private enterprises shows a slight improvement in optimism, but these businesses are heavily influenced by China’s interactions with the outside world, particularly the progress of trade negotiations with the United States.
Sternberg warns against assuming that the optimistic sentiment in the Chinese economy will continue. He points out two major critical issues in the Chinese economy. The first being a continuous decline in fixed asset investment for three consecutive months this summer. Fixed asset investment has been a key pillar of China’s economic growth for a long time, but now it is not just causing a “slowdown” but directly decreasing continuously.
The Chinese real estate market witnessed a burst in 2020, categorized as one of the biggest real estate bubbles in history. The concerning new development is the decline in fixed investment in manufacturing and infrastructure as well.
The previous investment-driven economic model of the Chinese Communist Party, fueled by massive debt, led to economic growth in the early 21st century but also laid the fundamental factors for economic instability.
Sternberg notes that some claim the Chinese economy is all sunshine and rainbows, but that goes against intuition. Another telltale sign of China’s economic trouble is its exports, which will eventually irk trade partners. No country is willing to absorb the impact of China’s economic mismanagement by importing excess products.
Sternberg suggests that the true root of China’s economic plight lies in policies failing to stimulate domestic consumption and entrepreneurial, high-productivity private investment. Despite official economic statistics showing a rebound in consumption, policies that rely on government subsidies for household purchases of white goods fundamentally cannot rescue the economy.
He believes that Beijing’s policies have veered into a state of complete imbalance, with the Chinese Communist Party trying to address the “internal curls” in various industries over the past year.
With other countries worldwide concerned about domestic industries being impacted by Chinese export products, especially the United States imposing high tariffs on China in the world’s largest importing market, China is left with only its domestic market.
Intense price competition has begun in the Chinese domestic market to absorb excess production capacity, sparking concerns about deflation in the Chinese economy.
While some ordinary Chinese households may benefit from fierce competition and falling prices, deflation could potentially destroy the profitability of heavily indebted businesses and local government balance sheets, posing a severe threat to the Chinese economy.
Beijing announced news of a new round of credit stimulus measures this week. State-owned banks are set to provide 500 billion yuan in loans directly, aiming to stimulate around 2 trillion yuan in public works and other project investments, primarily managed by local governments.
Sternberg argues that Beijing’s revival of these activities that should have been ceased aims to consolidate economic control in the hands of the state, prioritizing centralized power rather than achieving a rebalance of the Chinese economy. Such stimulus policies are futile for the Chinese economy.
“With export options currently unviable and no signs of improvement in reform prospects, it is predicted that bad news will continue to surface in the foreseeable future,” Sternberg forecasts.