Due to ongoing real estate and local government debt issues, Moody’s has lowered China’s sovereign debt rating.
News Analysis
The Chinese Communist Party (CCP) wrapped up its economic work meeting with no clear plan for resuscitating China’s economy.
The Political Bureau of the CCP Central Committee finished an important meeting
on Dec. 8, chaired by Chinese leader Xi Jinping, to guide China’s economic work in the coming year. The meeting was meant to outline the principles necessary to stabilize and improve the Chinese economy in the face of complex internal and external environments. However, the results appear to be more rhetoric with no substance.
Official statements from the meeting said that “
proactive fiscal policy should be appropriately intensified and improved in quality and efficiency,” although no clear steps to address flagging economic growth were outlined. Similarly, the CCP made it a priority to “
prevent and defuse risks in key areas and resolutely safeguard the bottom line against systemic risks.” While this is a clear nod to the real estate debt bubble, again, there was no mention of a concrete plan for accomplishing this.
The report claimed there would be reform and opening-up of the economy but also stated that there would be “
increasing macroeconomic regulation.” These two policy objectives directly conflict with one another and are symptomatic of the CCP’s dilemma. On the one hand, Xi seems to understand that the private sector is the economy’s growth engine. At the same time, the CCP does not want to relinquish control and let market forces regulate the economy.
This latest economic meeting, along with numerous previous statements by Xi over the past five years, has called for reducing reliance on exports and growing the economy through increased consumer demand. However, consumer demand
remains weak.
The state-owned Global Times reported that the Politburo vows to spur domestic demand, saying, “Judging from the signals from the meeting, boosting consumption will be a top priority.” However, citizens reduce their consumption when they are faced with a poor economic outlook, and China’s current situation does not instill consumer confidence.
Meanwhile, the long-awaited
real estate defaults are now materializing. Local government debt continues to climb. Although Beijing has indicated it will not permit local governments to default, the CCP also lacks solutions for the economic challenges, leading these governments to owe so much that repayment is impossible.
Debt
Due to ongoing real estate and local government debt issues, Moody’s Investor Service has lowered China’s sovereign debt rating. And owing to the substantial number of
real estate loans held by China’s banks, Moody’s has downgraded several Chinese banks and insurance companies.
Moreover, any funds directed by Beijing to
rescue local governments represent resources that otherwise could have fueled economic growth. Thus, although a complete and disastrous collapse of local governments may be averted, the overall economic outlook is unlikely to improve significantly.
Another factor inhibiting consumption is unemployment. Those without jobs cannot increase consumption. Beijing must address the youth unemployment problem, as over 21 percent of young people are currently jobless. Moreover, there is a need to find employment for the millions of migrant workers who are discovering that the factories where they once worked are now reducing production.
Xi called on attendees to “firm up their
confidence in development and actively provide suggestions and proposals to the CCP to promote high-quality development.” Apparently, the CCP believes that confidence in the economy can be restored by ordering Party members to feel more confident.
A similarly interesting bit of propaganda was a call to “improve social expectations as part of the nation’s efforts to promote reasonable economic
growth in 2024.” It seems that Beijing intends to downgrade people’s expectations about the economy rather than fix it.
The CCP will hold its next major meeting, the plenum, from Jan. 8 to 10. At that meeting, it is possible that more specific policies will be outlined. For now, however, it seems that CCP economic meetings generate more wish lists than to-do lists.
