If Stimulus Could Save China, It Wouldn’t Need It
The problem isn’t too much saving, it’s that politics inhibits productive investment of capital.
By Joseph C. Sternberg
Xi Jinping addresses a reception in Beijing, Sept. 30. Photo: Xie Huanchi/Zuma PressBeijing faces a lot of economic challenges these days.
So it is that no sooner had the government last week unveiled its biggest attempt in years to shore up flagging growth than new calls emerged for more, more, more.
What economist and investors, many of them foreign, want now is fiscal stimulus—debt-fueled government spending to boost aggregate demand in the Keynesian mold—to accompany the credit stimulus Beijing has tried to implement of late.
The Communist Party may even deliver.
Not that it’ll mean much for the economy.
China’s problem is that although Beijing has been dismantling the country’s old property-driven economic model for four years, it has yet to devise a viable long-term replacement.
At the peak of this now-defunct system, real estate—purchasing it, developing it, selling it and all sorts of related activities—accounted for around one-third of China’s annual output.
Observers in and outside China have long understood the dangers of this, especially because the country’s property economy was built on unrealistically cheap credit and unsustainably ebullient sentiment.
Xi Jinping was the first leader brave (or foolish) enough to take action, when in 2020 he cracked down on excessive mortgage lending and started allowing property developers to go bankrupt.
Property prices have experienced a terrific correction, down roughly 10% in inflation-adjusted terms since summer 2020 by one measure from the Bank for International Settlements.
The property market is starting to function as it would in a normal economy, with prices likely to stabilize in the coastal cities where there is demand and still falling in inland areas in response to declining populations.
Chinese appear to have gotten Mr. Xi’s message that “houses are for living in, not for speculation.”
It’s working so well that Beijing has come to worry that the property correction might spiral out of control.
So officials have introduced a range of stabilization measures—easing restrictions on mortgage lending, reducing interest rates, creating a new subsidy program for local governments to buy unsold properties for social housing, using a regulatory change to free up around a trillion yuan ($140 billion) of new lending capacity at the banks, and so on.
All this might put a floor under the property market.
But Beijing hasn’t been able to articulate what comes next.
Economists could tell Mr. Xi—correctly—that China needs a transition to greater reliance on domestic consumption and on the production of goods and services to supply those new demands.
This is why now you’re hearing calls for a new and different form of stimulus: 1 trillion to 2 trillion yuan (who’s counting?) of transfer payments directly to households, either as a one-off handout or through the development of a permanent welfare state.
This would mark a Keynesian attempt to trigger a virtuous spiral of rising household consumption and business investment to satisfy the new domestic demand.
To be fair to the stimulus-niks, in theory a boost of this sort might solve a conundrum that has challenged China’s economy for decades.
The key is to examine how the transfer spending would be paid for.
The idea is for Beijing to issue government bonds to fund the transfer payments, bearing in mind that stimulus is only ever stimulative if it’s debt-financed.
Who would buy those bonds?
Probably not foreigners, amid rising geopolitical tensions, deteriorating economic prospects, and Beijing’s demonstrated propensity to intervene in bond markets to suppress prices.
This leaves the burden on domestic institutions such as banks, insurers and pension funds.
They’d have the capacity to lend to Beijing for this purpose because their balance sheets are bloated with households’ phenomenal quantity of savings.
Understood this way, a handout stimulus starts to look like a way to launder households’ own savings back to themselves via the government fisc.
It’s a plausible attempt to tackle China’s Other Big Problem alongside property: households’ and businesses’ decades-long cash hoarding.
This saving, too often derided as a “glut,” should be China’s greatest asset (literally and figuratively).
That cash could have spent the past several decades investing productively in entrepreneurship to generate wage growth and capital incomes and the consumption that follow.
Instead that capital has been forced to sit fallow or flow into real estate thanks to Beijing’s tight financial controls on the economy, favoritism for some industries and hostility to others—a matrix of conditions known as financial repression.
Alas, recycling China’s savings through a handout-palooza won’t fix this.
Keynesians assume the Chinese save because they can’t rely on social benefits like America’s Social Security, which may even be true, but the high savings rate isn’t China’s problem.
The low productivity of those savings is.
The political controls on the economy that created this situation aren’t going away under Mr. Xi and will thwart the Keynesians’ longed-for virtuous circle.
Any new money funneled into consumption will land in a business ecosystem facing the same financial-political inhibitions on productive investment as before.
A paradox: If China were capable of benefiting from a new spending stimulus, the economy wouldn’t need one.
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