CHINA´S ECONOMY IS STUCK IN A VICIOUS CYCLE / THE WALL STREET JOURNAL

China’s Economy Is Stuck in a Vicious Cycle

Country’s economy is caught between wary households and wobbly property firms, with no clear escape route

By Nathaniel Taplin

The pandemic-era collapse in consumer confidence, borrowing, and job prospects is still a huge obstacle to China’s recovery. PHOTO: CFOTO/ZUMA PRESS

China probably can’t fix its broken housing market without fixing the labor market and consumer confidence. 

But more exuberant consumers and a stronger labor market depend on a healthier housing sector, too.

Until Beijing finds a way to square that circle, expect China’s subpar recovery to dribble on.

China’s growth in 2023 has been stubbornly uneven. 

The official purchasing managers indexes for November, released Thursday, drove the point home: While the construction index ticked up slightly, both the manufacturing and services sector indexes slid further. 

The latter even moved below the 50-point mark separating expansion from contraction for the first time this year. 

A brief spurt of better growth in the late summer already appears to be running out of steam.

For manufacturing, part of the problem is external—the new export orders subindex slid half an index point to 46.3, back to the 2023 low it hit in July.

But especially in services, the pandemic-era collapse in consumer confidence, borrowing, and job prospects is still a huge obstacle to the recovery. 

Households haven’t bounced back from the brutal one-two punch delivered by the housing meltdown of late 2021 and the “zero Covid” lockdowns of 2022. 

These effectively maimed housing, the key source of household wealth, and the jobs market.

In retrospect, it’s increasingly clear just how critical late 2021 and early 2022 really was. 

Services employment had been lagging behind since early 2020, but in early 2021 construction employment, household borrowing and confidence were all flying high. 

By late 2021 all three were trending downward, followed by an abject collapse in early 2022 as Beijing locked down large parts of the economy to fight the Covid-19 outbreak in Shanghai and other major cities.

That damage has lingered. 

Since September 2021, the services and construction sector employment PMI subindexes have averaged 1.4 and 4.3 index points below their average of the five years beforehand. 

Nominal household income growth in 2023 is only about 6% according to consulting firm Gavekal Dragonomics, against roughly 9% annually from 2017 to 2019, and in 2021. 

Consumer confidence and borrowing remain far below pre-Covid trends.

There are several reasons, but a key one boils down to the following. 

Households aren’t willing to borrow or buy homes as long as the labor market remains deeply troubled, and they have little confidence in property developers’ finances. 

But the labor market will struggle to find its footing unless the housing sector recovers because the latter is, directly or indirectly, such a big source of employment—not only for construction workers but also real-estate agents, furniture vendors, truckers, engineers and many others.

It’s hard to see how the economy can effectively escape this trap unless Beijing steps in to bail out developers—one way or another—on a very large scale. 

But that is politically extraordinarily difficult, since the notion of curbing speculation in the housing market and developers’ financial excesses has been such a rallying cry in Beijing for the past several years.

The path of least resistance, barring a major financial crackup, may be a continued slow slog forward.