The Chinese Communist Party (CCP) has fallen short of the economy’s needs — again. It has arranged lots of meetings, and its leaders have made lots of speeches, full of upbeat rhetoric, but they have shown no imagination and offered little of substance to deal with China’s serious and manifold economic challenges – a metastasizing property crisis, export shortfalls, youth unemployment, depressed levels of consumer confidence, and a reluctance by private business to invest in the future.
Beijing has put forward little of substance to deal with the property crisis. After years during which the authorities neglected the economic and financial fallout of the property crisis, they have at last acted but with only two small gestures. First is the People’s Bank of China’s (PBOC’s) to cut interest rates farther than it already has. Oddly enough, right after making this promise to the CCP’s Two Sessions meeting, the bank at its own meeting decided to hold interest rates steady. Even if coming months see rate cuts, there is ample reason to doubt their effectiveness. After all, the PBOC has cut interest rates five times over the last 24 months and yet housing sales and construction have continued to fall, with sales down 33% from year-ago levels in the first two months of this year and new construction down 30%. Against such a record, it is only reasonable to ask if interest rate cuts answer the needs of the matter.
Beijing has also launched a program that it calls the “white lists.” In it, local governments identify failing property developments for financing that the state-owned banks will provide after they review the proposal. In principle, it is not a bad idea. It certainly has more promise than small additional PBOC interest rate cuts. The program would have been more effective had Beijing instituted it two years ago when the crisis first emerged and had not yet had time, as it has, to undermine confidence in the future of real estate investing and in financial arrangements generally. Any help such a program can offer now is limited accordingly but also because its scale is too small. Consider the $17 billion equivalent earmarked for “white lists” so far is barely over 5% of the $300 billion in liabilities Evergrande announced in 2021 that it could not cover, much less the weight of the failures that have followed that announcement.
Otherwise, China’s leadership has turned away from the property crisis yet again. This is a shame, because the nation’s property problems lie at the root of other severe economic challenges. The failures in property development have not only restrained Chinese finance and depressed housing sales and construction, but they have also forced down real estate values, and since real estate is the primary asset for most Chinese, this loss of value has cut deeply into household wealth and is the primary reason why consumer confidence has cratered and households are so reluctant to spend.
Rather than recognize these sorts of economic interactions and take policy beyond the small gestures outlined above, China’s leadership has decided simply to change the subject. All but ignoring the property crisis and the problems of Chinese households, leaders at the CCP’s Two Sessions conference talked mostly about bolstering manufacturing. This they asserted is where China would take what they called “a new leap forward.” Beijing’s thinkers spoke glowingly of the “modernization of the industrial system” through “science and education.” Speakers emphasized artificial intelligence, new energy vehicles, hydrogen power, biomanufacturing, commercial space flight, new materials, and innovative drugs.
Though modernization in business and industry is always a good idea, problems remain. For one, the resources allocated to this heroic effort are inadequate to make much difference. Beijing has allocated 10.4 billion yuan ($1.5 billion) for modernization and training, a pittance in an $18 trillion economy.
Nor has Beijing offered anything concrete beyond this small amount on how to promote this change. Indicative are remarks by Premier Li Qiang. According to the official translation of his talk, China will “spur industrial innovation by making innovations in science and technology.” This is meaningless. It effectively says that the nation will innovate by innovating. That is not a plan; it is a logical circle.
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Nor does this new emphasis make an appearance in Beijing’s only major policy proposal: infrastructure spending, China’s default stimulus for decades now. The plan calls for 3.9 trillion yuan ($541 billion) in special purpose bonds for local government to finance projects and an additional 1 trillion yuan ($138.9 billion) in bonds issued by the government in Beijing to finance other projects. So far, Beijing has not revealed specifics on planned projects. The fact that the government plans to issue “ultra-long-term” bonds for financing suggests that the planners do not expect an early payoff. Some suggestions of huge projects on the scale of the Three Gorges Dam development have surfaced. That project started in the 1990s and was not operational until 2015.
Then there is the question of where all this new innovative manufacturing will go. Since Beijing has done nothing to deal with the problem of household finances and depressed levels of consumer spending, the only viable outlet for all this modern and efficient manufacturing would be exports. But there China faces significant efforts by American, European, and Japanese businesses to diversify their supply chains away from China as well as a growing hostility to China trade in Washington, Brussels, and Tokyo.
It would seem from all these questions and loose ends that Beijing has failed to think through its plans, to recognize that the pieces of the economy link one to the other and that even a powerfully centralized state such as China cannot develop one area without reference to the rest of the economy. This failure all but ensures that China’s economic and financial problems will persist for some time yet.
OTTAWA – The Canadian economy was flat in August as high interest rates continued to weigh on consumers and businesses, while a preliminary estimate suggests it grew at an annualized rate of one per cent in the third quarter.
Statistics Canada’s gross domestic product report Thursday says growth in services-producing industries in August were offset by declines in goods-producing industries.
The manufacturing sector was the largest drag on the economy, followed by utilities, wholesale and trade and transportation and warehousing.
The report noted shutdowns at Canada’s two largest railways contributed to a decline in transportation and warehousing.
A preliminary estimate for September suggests real gross domestic product grew by 0.3 per cent.
Statistics Canada’s estimate for the third quarter is weaker than the Bank of Canada’s projection of 1.5 per cent annualized growth.
The latest economic figures suggest ongoing weakness in the Canadian economy, giving the central bank room to continue cutting interest rates.
But the size of that cut is still uncertain, with lots more data to come on inflation and the economy before the Bank of Canada’s next rate decision on Dec. 11.
“We don’t think this will ring any alarm bells for the (Bank of Canada) but it puts more emphasis on their fears around a weakening economy,” TD economist Marc Ercolao wrote.
The central bank has acknowledged repeatedly the economy is weak and that growth needs to pick back up.
Last week, the Bank of Canada delivered a half-percentage point interest rate cut in response to inflation returning to its two per cent target.
Governor Tiff Macklem wouldn’t say whether the central bank will follow up with another jumbo cut in December and instead said the central bank will take interest rate decisions one a time based on incoming economic data.
The central bank is expecting economic growth to rebound next year as rate cuts filter through the economy.
This report by The Canadian Press was first published Oct. 31, 2024
