In light of the latest subdued economic figures for the first half of the year, China has been swift to implement measures to achieve its annual growth target of 5 percent. The government has placed a distinct focus on empowering the private sector and amplifying consumer spending.
In a concentrated effort spanning just two months, China introduced a plethora of policy reforms. The Central Political Bureau launched a comprehensive thirty-one-point plan dedicated to fortifying the private sector, vowing to enhance the business climate. The Ministry of Commerce, in tandem with thirteen other departments, championed augmented consumption in households, and the Ministry of Finance provided tax concessions for enterprises and individual entrepreneurs.
However, the effectiveness of these policies in genuinely reviving the economy and restoring confidence remains undetermined. While the People’s Bank of China has assertively cut interest rates, some of the government’s proposed policies seem superficial on paper, bordering on bureaucratic platitudes.
Also, it is noteworthy that the government’s present measures seem somewhat narrow in scope and lacking in depth. For instance, tax incentives and start-up initiatives focus predominantly on minuscule-profit enterprises with limited financial thresholds. This overlooks the significance of small and medium-sized enterprises (SMEs)—entities that form the bedrock of China’s economy. These SMEs, accounting for a whopping 99.8 percent of all companies and nearly 80 percent of employment, haven’t been given adequate attention by current policies.
Historically, China has recognized and leveraged the power of expansive economic initiatives. The 2008 stimulus program is a case in point, where China infused the economy with four trillion yuan to counteract the global financial crisis and the aftermath of natural disasters.
Given current economic uncertainties, there is speculation on whether China might resort to a similar, grand-scale stimulus. However, the escalating debt levels of local governments pose a significant barrier. Predictions from the International Monetary Fund (IMF) estimate China's debt-to-GDP ratio will reach 55.1 percent by 2023. Additional data from the Rhodium Group indicates that this number could approach a concerning 100 percent when factoring in explicit and implicit liabilities from hospitals and schools.
Simultaneously, the country’s real estate sector is showing signs of strain. Prominent property developers such as Evergrande and Country Garden face financial challenges, affecting other industries and heightening systematic risks.
Recent defaults by key financial entities further underscore this instability. Zhongrong Trust, China’s premier private asset management entity overseeing approximately 230 billion yuan for 150,000 affluent clients, recently declared a default.
China now stands at a crossroads, faced with a vexing conundrum: a slowing economy demands aggressive expansionary measures to reinvigorate the market, but such actions might inexorably inflate the debt. This fleeting surge could be precariously bubble-like, potentially heralding a “lost decade” for China.
Moreover, China's current strategy seems inconsistent. While the government desires to foster a conducive business environment, actions like the “apprehend spies” campaign and office raids have precipitated a foreign investor retreat.
Several key businesses and financial institutions face challenges operating in China, further eroding international confidence. The Beijing branch of Mintz Group, previously subjected to an unexpected raid, incurred a $1.5 million fine, the rationale for which remains nebulous. Morgan Stanley’s Shanghai office was picked for on-site inspections, possibly due to its downgrading of China’s stock market.
Unlike other nations, China’s economic policies hinge predominantly on the governing philosophy of the Communist Party’s paramount leader. In Xi Jinping’s latest article published by the party journal, Qiushi, he emphasizes the importance of modernization with Chinese characteristics. By highlighting perceived problems in Western modernization paradigms, he posits that China is charting its distinct path.
In 1992, China’s economic reform architect Deng Xiaoping embarked on a momentous journey to the southern reform pioneer, the Guangdong Province. This “Southern Tour” was a watershed event, reaffirming China’s commitment to economic reforms. It decisively quelled doubts regarding China’s alignment with the Western market economy and laid the foundation for China’s developmental course in the ensuing decades.
Now, more than ever, China needs a similar visionary leadership. A decisive and coherent strategy, supported by unwavering political commitment, is vital to steer the nation towards sustainable growth.
Xiangxue Zheng is a researcher focusing on China and East Asia. He holds an M.A. in International Relations from Johns Hopkins University, School of Advanced International Studies (SAIS). He is based in Washington, DC.