China — the world’s second-largest economy — is in the midst of a lengthy period of deflation. China’s leaders know it. They’re just not doing enough to fix it.
They have been lauded for releasing a stimulus package that would ease interest rates, help local governments tackle their debt loads, inject more liquidity into state banks and direct some cash payments to consumers, especially those with two or more children. The announcement of this package on Sept. 24 — with no total price tag attached — sparked a brief rally on China’s stock market. Additional measures were unveiled last week. Finally the government seemed to be doing something, anything, to address the economic slowdown.
But the actions announced so far are the low-hanging fruit. The interest rate cut followed the U.S. Federal Reserve’s move, which gave China’s central bank more room to maneuver. Cash handouts for families with multiple children bolster the government’s drive to reverse a demographic decline. And China needs to do something about the piles of debt that local governments have racked up, if the country is to have any hope of reaching this year’s evermore elusive growth target.
The real problem with China’s economy, though, is the same one that economists, diplomats and government officials have been warning about for nearly two decades: China invests too much, and Chinese people spend too little. China’s leaders have been talking for years about the need to shift to a consumer-led economy — more like the United States, Japan and Europe. But they’re still only talking about it.
In March 2007, speaking at the National People’s Congress, the country’s rubber-stamp legislature, then-Prime Minster Wen Jiabao urgently warned that “the biggest problem with China’s economy is that the growth is unstable, unbalanced, uncoordinated and unsustainable”. Six years later, in his final address to the congress, Wen sounded the exact same alarm.
In early 2012, the World Bank and China’s Development Research Center, its leading think tank, published a report titled “China 2030”, which called for substantial structural reforms and spelled out the need to shift from its once successful growth model built on exports and government investment toward a more modern economy fueled by consumer spending. The report was widely publicized — but not much was done.
In July of that year, in a story I wrote for The Post headlined “Getting Chinese to stop saving and start spending is a hard sell”, I quoted Wen saying, “Expanding domestic demand, particularly consumer demand ... is essential to ensuring China’s long-term, steady and robust economic development”.
Now, a dozen years later, I could change the dates and a few names and write pretty much the same piece.
In the United States, spending for household consumption consistently accounts for roughly 70 percent of gross domestic product. In India and Britain, it makes up closer to 60 percent. In the European Union, the share is more than 50 percent. In China, household consumption is a paltry 38 percent of GDP — essentially unchanged from 12 years ago.
The Chinese are consummate savers — and that’s partly the government’s fault. Without much of a social safety net to rely on, people save for unexpected health emergencies, for their children’s and grandchildren’s education, and for their retirement. They save as a hedge against any number of possible future calamities. And they spend little because their incomes remain comparatively low; after rent and daily expenses, there’s little money left over.
Ordinary citizens aren’t the only savers. Businesses save, and local and provincial governments do, too. And though this might sound like a virtue, when consumers aren’t spending, businesses suffer because few people buy what their factories make. The only solution is to ship the excess stuff overseas, increasing China’s trade imbalance with the world.
Before, in the first decades after China’s economic opening to the world in 1979, government investment was the country’s economic engine. China built the world’s most expansive high-speed rail network, a highway system longer than America’s interstate freeways, an abundance of new airports, new and often unused and abandoned central business districts in the most far-flung cities and towns, and housing. Lots and lots of housing. So much housing that the country now has a glut — and collapsing property prices.
All this infrastructure was considered necessary as the country was emerging from three decades of poverty after the founding of the Communist People’s Republic of China. But now, after decades of spectacular growth, China’s economy is grinding to a halt. And every policy solution carries risks and consequences. Increasing wages, for example, gives workers spending power — but it also undercuts China’s role as the world’s factory built on cheap labor.
For decades, when China enjoyed double-digit growth, the Communist Party’s economic policymakers looked like technocratic geniuses. But do they know how to operate in a downturn? Even amid a slowdown, China remains a leading economic engine. It accounts for 18 percent of global GDP and is the world’s top exporting nation. Now, the entire global economy hinges on whether its leaders are up to the task.
Keith B. Richburg became a member of the Editorial Board in 2023. He joined Post Opinions as a Global Opinions columnist in 2022.