Fears about China’s slowdown might be overblown
Nicholas Lardy in this commentary argues that fears that China is “now gripped by a severe cyclical downward spiral that will persist for several years,” are premature or even wrong. China is facing many structural and other challenges that will prevent its economy to return to the exceptional growth of the 1980-2010 period. These challenges include: slumping productivity, a shrinking labor force, restrictions on the transfer of technology imposed by the United States and other countries, an ongoing real estate bubble’s correction, elevated unemployment among younger workers, and a leadership that seems to prioritize party control and national security over economic growth. But the main reason why GDP growth in the second quarter of 2023, on a year-of-a-year basis, was disappointing was partly because the expansion of household consumption fell to 15 percent compared with 33 percent in the first quarter. Lardy goes on to predict:
- The share of output accruing to households is now rising, not falling. The combination of rising personal incomes and a falling saving rate means that future household consumption growth will likely surprise on the upside.
- The 0.3 percent decline in consumer prices in July 2023 compared with a year ago was mostly due to elevated food prices in the same period of 2022. It is therefore premature that China is at risk of deflation.
- During the first half of 2023 inventories were record high, as a result the short-run incentive to invest to expand production capacity in manufacturing, was weak. But in the first half inventories fell, perhaps setting the stage for increased investment going forward.
How serious is China’s economic slowdown?
By: Nicholas R. Lardy – Peterson Institute for International Economics
China is on the cusp of a Japan-like deflation
Takatoshi Ito takes a completely different view from Nicholas Lardy above: he argues that a prolonged period of stagnation and deflation, triggered by a property-bubble collapse, seems increasingly likely. He notes that Evergrande, the massive Chinese real-estate developer, defaulted on its debt in 2021 and now property developer Country Garden has missed $22.5 million in payments for offshore bonds and suspended trading in 11 onshore bonds, raising the prospect of a default. These events might be a precursor to a property-bubble collapse. In that case, it’s worth highlighting two unique aspects of the Chinese economy: a) a large share of real-estate investment is carried out through so-called local government financing vehicles, therefore the sector’s performance has a direct impact on public balance sheets; and b) the biggest four banks are state-owned, so the central bank and the government can always step in to provide needed capital and avert a banking crisis. Ito suggests that for China to avoid a Japan-like deflation:
If the property bubble bursts, China’s banks and government must avoid the mistakes Japan made three decades ago. For starters, full and timely disclosure of NPLs is essential. Chinese banks must not succumb to the “evergreening” temptation and extend new loans to insolvent “zombie” borrowers so that they appear healthy. And where capital injections are needed, they must be delivered quickly.
Is Japan-style Deflation Coming to China?
By: Takatoshi Ito – Columbia University
