Will China’s Next Stimulus Plan Stop the Downward Economic Spiral?

Beijing’s latest plan for capital infusion may be not even a temporary fix for a long-term problem.

A resident wearing a mask naps on a bench near the Chinese Communist Party's propaganda slogan "Chinese dream" in Wuhan, China, on April 1, 2020. Ng Han Guan/AP Photo

Commentary

Is the Chinese economy really bouncing back?

According to the Chinese Communist Party (CCP), China’s economy is actually performing reasonably well and steadily improving.

But is this true?

Are Happy Times Back?

In his speech at a Dec. 11–12 conference, Xi Jinping claimed that “the economy is stable and making progress ... and the main economic and social development goals ... are about to be successfully completed.”

Imagine the relief that the entire country must have felt after hearing the leader of the CCP confidently declare the economy’s health. By the sound of it, the economy is well on its way, if not on the very threshold, of reaching its long-term goals of a greater, more economically vibrant, fair, and prosperous China for everyone.

And yet, more stimulus is on the way.

What’s really going on?

Xi’s Words Contradict Reality—And His Actions

Are the “main economic and social development goals” truly about to be completed?

Is the “stable economy” driving the nation toward those lofty goals, as Xi claims?

The answer to those questions is, in a word, no.

The truth is that despite the official and highly optimistic pronouncements of China’s economic well-being, it’s simply not the case. Furthermore, Xi’s words are falling on skeptical ears. If Chinese markets are any indication of investor confidence and public opinion—and they are—the Chinese people aren’t buying the CCP’s charade, as the markets’ response to the conference was negative.

Is China Turning Japanese?

More than a few observers have noted that China’s economy is showing similarities to Japan’s of the early 21st century, and they’re not wrong. The comparison is worth noting.

For example, key problems that led the Japanese economy into two decades of malaise and stagnation were, and remain, cratering demographics, a high public debt burden, crashing asset prices, particularly in real estate, reliance on foreign demand, and deflation.

China faces those same challenges, among others, such as high unemployment, especially among younger workers. What’s more, the Chinese economy is structurally flawed in at least two specific ways.

One flaw has been and remains China’s dependence on foreign investment and demand for its economic development and survival. Tariffs, sanctions, rising labor costs, and lower-priced competitors have reduced China’s dominance as the world’s manufacturer, while domestic demand remains painfully low in comparison.

Another flaw has been China’s overreliance on the real estate sector, which has accounted for up to one-third of its GDP over the past several decades. That structural weakness now has catastrophic consequences in the form of unmanageable public debt reaching trillions of dollars, a vast oversupply of unoccupied buildings, and collapsing property values. China’s real estate deflation crisis is only made worse by an aging and shrinking population that has little, if any, confidence in the CCP’s ability or policies to turn the economy around.

These and other reasons—including lack of freedom and expanding Party control over the economy—are why China’s economy has problems sustaining itself and generating long-term growth and stability.

Waving the Stimulus Wand Again and Again

Of course, the CCP relies on more capital infusions to rescue China’s economy. It’s not the first time the Chinese authorities have waved the stimulus magic wand to inject billions of dollars’ worth of “new money” into the economy, lowering interest rates and other stimulus measures. They’ve been doing so for the past decade or longer.

Both history and the present are crystal clear: It won’t work. Stimulus, it turns out, is much less stimulating than its namesake implies when it’s overused.

Chinese economists such as Zhang Weiying understand that from a structural perspective, stimulus and other monetary tools aren’t enough to turn things around. Much more is needed to unleash the full potential of China’s economy, and specifically domestic consumption, which is driven by consumer earnings and confidence. Both are weak. According to Zhang, “Building entrepreneurial confidence depends primarily on the reform direction, not on the strength of monetary policy stimulus.”

High Consumer Confidence Is Key to Growth, Stability

In other words, for the Chinese economy to truly grow and succeed over the long term, economic and political reform is necessary for consumer confidence to rise. Higher consumer confidence leads to greater demand and higher spending, which grows the economy. That’s basic macroeconomics.

However, according to Zhang, to raise consumer confidence over the long term, the Party will need to make fundamental changes to the economy. That would require transforming China from a Party-dominated, command economy into a dynamic, growth-oriented economy driven by domestic consumption, innovation, and a growing middle class.

How likely is that to occur?

CCP Demands More of the Same Policies

A recent proposal called “Promoting the Private Economy,” which is intended to stimulate business growth in the private sector, demands that private companies must “uphold the leadership of the Communist Party of China, adhere to the socialist system with Chinese characteristics, and actively participate in building a strong, modern socialist country.”

Furthermore, businesses must “accept government and social supervision when engaging in production and operations.”

In other words, the proposal simply includes more of the same policies and Party control that caused the problems in the first place. Clearly, when it comes to reform, the CCP talks the talk but can’t walk the walk. China’s state-planned economy will remain structurally unchanged.

Like The Who song says, “Meet the new boss, same as the old boss.”

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.