cross-posted from: https://beehaw.org/post/17822004
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Debt and overinvestment have caused productivity decline and deflation. With debt levels soaring to 350% of gross domestic product (GDP), each yuan injected into the economy yields diminishing returns. Adding to the challenge is overinvestment of nearly 45% of China’s GDP funneled into projects that now face declining domestic demand. This flood of excess capacity has led to deflationary pressures in both producer and consumer prices.
China’s property market, once an anchor of the country’s wealth, has become a liability, with more than 60 million empty units. Property represents about 60% of a Chinese family’s net worth, compared to 27% in the U.S., eroding consumer confidence. Efforts to boost domestic consumption have largely fallen short. Unlike in the U.S., where lower interest rates typically encourage consumption, the Chinese are reluctant to spend, concerned about falling property values and the absence of a strong social security net.
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Since the global financial crisis, China has rolled out five major stimulus packages. Each intervention has provided a short-term market lift coinciding with a cyclical boost to growth, but as evidenced in the last cycle of 2022, such effects are beginning to wane. Japan’s “Lost Decade,” beginning in the 1990s, provides a sobering parallel. Following its economic peak in the 1980s, Japan experienced long-term stagnation interspersed with brief market rallies that averaged 45% within a downward market trend.
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In China, stimulus increases supply rather than demand, leading to excess capacity, which it exports.
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Bottom line: We believe there are no quick fixes for China’s economic quandary. Only a complete debt restructuring, followed by bank recapitalization and government-led redistribution will drive meaningful, positive change. It will no doubt be painful. Until China addresses the root issues—excessive debt and inefficient investment—stimulus measures may provide fleeting relief but will remain mere band-aids.