April’s Politburo meetings of the Chinese Communist Party’s (CCP’s) faithful were supposed to unveil new, more effective policies to deal with China’s economic problems. But all the Politburo saw was a rehash of existing policies that, so far, have had little or no substantive effect on the economy.
Now, Party leaders have implicitly promised more for July’s Third Plenum meetings. Given the behavior of China’s leadership to date, observers can be forgiven for skepticism that anything more substantive will emerge in July. Indeed, the lack of effective policy suggests that Beijing has little or no idea how to handle China’s severe economic challenges.
In the meantime, China’s economy has continued to show signs of weakness. Some hope emerged in the opening months of the year that the worst was over and that activity was picking up. But more recent data have scotched that hope. Surveys of purchasing managers show that economic activity has slowed again and stagnated between growth and decline. That is better than the outright declines recorded in 2023 but hardly a basis for much optimism. Meanwhile, data on services show outright declines from the gains of earlier in the year. Industrial profits reported for the first quarter have plunged from year-ago levels—for both state-owned and private firms.
And of course, the real estate crisis continues to fester and drag down home sales and construction. Sales among the top 100 developers, according to the China Real Estate Information Corp., are some 43 percent below last year’s levels, down 13 percent just since March, and 80 percent below the levels of December 2020, before the property crisis broke. Exports have turned up, but that is less a sign of economic health than a sign that the declining value of the yuan has given China a transitory advantage over its competitors in the simpler, price-sensitive products that the nation’s leadership otherwise wants to deemphasize.
Yet in the face of all this sad economic news, all the nation’s leadership in Beijing has managed to offer are small, clearly inadequate measures or, worse, just vague promises of something more effective. At the March Two Sessions meeting, the leadership discussed having the People’s Bank of China (PBOC) cut interest rates and offer a program called “white lists,” in which local governments identify stalled development projects for special financing that state-owned banks will advance after their review.
The leadership also talked about issuing bonds—an obligation of Beijing—to ease the debt strain on local governments. The implication then was that more substantive policy measures would be announced at the Politburo meetings late in April. But all that emerged for the Politburo was a repeat of these three measures and vague promises of something more soon.
The “white lists” have some merit, but so far, Beijing has engaged on such a minuscule level that the effort hardly meets the need. So far, money flows barely exceed 5 percent of the initial Evergrande failure announced in 2021, much less the failures that have occurred among other developers in the years since, including those of Country Garden. Unless the program scales up drastically and rapidly, the “white lists” are more a talking point for CCP meetings than a policy, much less a remedy for the property crisis. Similarly, the bond issues from Beijing, although a considerable 1 trillion yuan (about $140 billion), can at most only make a dent in the local government debt overhang that has been estimated at $11 trillion.
The PBOC interest rate cuts are even less impressive. So far, the bank has cut rates five times but for a total of less than half a percentage point. Such a small move could hardly be expected to raise the economy, even in the best of circumstances—and circumstances are far from optimal. During the time that the PBOC has been cutting interest rates, China has seen moderate inflation of about 2 percent per year turn to moderate deflation of about 0.8 percent per year.
After considering the effect this change has had on the buying power of money borrowed and repaid, real interest rates in China have effectively risen, acting not as a stimulus but as a disincentive to borrow and spend. The bank would have had to cut interest rates by 2.8 percentage points just to keep incentives as they were when the rate cutting started. It will have to do a lot more to encourage borrowing and spending.
Other than these policy gestures, all Beijing has done is make promises. It told the Politburo that it would soon explain policies to “digest” the backlog of unsold housing in the country. That would be a tough chore since much of this housing is in places where Chinese people do not want to live. But so far, all that Beijing has offered is to say that it is working on it. Those attending the meetings were also promised a “thorough” plan to tackle excess local government debt. But no one has heard the details of such a plan.
Some have speculated that such new policies will make an appearance at the Third Plenum scheduled for this coming July. Something might emerge, but given leadership’s behavior to date, the huge policy shifts that China needs to deal with its challenges are not especially likely. It is not even a sure thing that the Third Plenum will come off on time. The CCP’s governing charter calls for at least one plenum meeting per year, but in China, it has been 17 months since the last meeting, the longest interval since Mao Zedong was in charge. Clearly, the Party’s and the nation’s leadership do not know what to say or do.
If the meeting goes as planned and China’s leadership announces forceful policies, the economy might begin a recovery. But these are two big ifs. More likely, recent patterns will prevail, and China will have a struggling economy for some time to come.
