Chinese focus on production Overconsumption, an increase in supply rather than demand, raises the question of what or who this supply is ultimately for. If domestic consumption remains sluggish, the only option is to export surplus supply. This is likely to provoke, if not already, a protectionist backlash from developed countries and similarly upset developing countries aiming for export-led industrialization to boost growth.
Since the second half of last year, Chinese authorities have responded to the economic slowdown in three main ways. The first thing I did was Reducing borrowing costs – But China’s problem today is not credit supply, but lack of credit demand. The second was for the central government to borrow money and invest in infrastructure development, which would require issuing 1 trillion yuan (US$138 billion) in bonds. Approved in October It doesn’t seem to be providing much of a stimulus to the economy.
The third one, which has recently become clear, is to increase investment in “.New quality productivity” – an abbreviation for China’s industrial policy to increase the production capacity of advanced manufacturing industries and achieve self-sufficiency in future key technologies. This strategy is likely to result in overcapacity and create further deflationary pressures.
The Japanese flag waves in the wind outside the Bank of Japan building in Tokyo. Despite very low and even negative interest rates, Japan’s debt deflation continued for more than 20 years.Photo: Reuters
Chinese officials privately admit that domestic consumption is weak, but deny that the country has an oversupply problem. However, oversupply and insufficient demand are two sides of the same coin. Chinese policymakers also seem to believe that supply creates its own demand, when normally the opposite is true.
At its core, central planners often view market economies as machines or mechanical systems that can be precisely designed or predictably controlled. But economies are not mechanical; they are complex, adaptive systems.
First, market economies are complex because they consist of many interconnected parts that interact in ways that are not necessarily visible or obvious to policy makers. This means that everything is interconnected, so a small shock to one part of the system can have large, unexpected effects on another part. This is sometimes known as the “butterfly effect.” Additionally, making major changes may not produce the desired results.
of global financial crisis Sixteen years ago provides a vivid example of this. Although subprime mortgages were never a significant part of the U.S. mortgage market, problems with this obscure part of the mortgage market brought the global financial system to a standstill. This was because there was a risk that subprime mortgages would go bankrupt. It was distributed throughout the financial system through securitization.
vice versa, JapanThe lost decades from the mid-1990s to the early 2020s meant that even very low (and sometimes negative) interest rates may not provide the desired boost to consumer spending, investment, or inflation as deflationary expectations take hold. It showed that there is a sex.
A high-rise apartment building under construction in Zhengzhou City, Henan Province, China. Even after the court order to liquidate Evergrande, China’s real estate sector still faces myriad challenges.Photo: Reuters
China’s real estate sector is not only unusually large, accounting for about a quarter of annual output, but also deeply connected to other parts of the Chinese economy, particularly through lending to local governments. Chinese household wealth is also highly concentrated in real estate. Just as systemically important financial institutions had to be rescued to prevent financial collapse 16 years ago, China’s big real estate developers may also be too interconnected to fail.It is unlikely that a decision will be made By a Hong Kong court in January liquidate evergrandeThe world’s most indebted real estate company has announced the end of China’s real estate debt crisis.
Second, the economy is adaptive in the sense that the businesses and households that make up the economy constantly anticipate and adapt to changing conditions. Their expectations and behaviors are adaptive rather than completely rational. They also react when they see others react. This imitation means that group psychology amplifies errors in individual decisions rather than correcting them. Great Depression-era economist John Maynard Keynes coined the term “animal spirits” to describe how human emotions, rather than rational calculations, drive investment decisions during times of instability. I made.
China today faces a decline in animal spirits, and policymakers cannot afford to hesitate or send mixed signals when it comes to revitalizing the economy. Statements such as describing fiscal stimulus as creating a “welfarism trap” or hesitating to cut interest rates for fear of reigniting the real estate bubble (which would be understandable under normal circumstances), are statements that suppress the souls of animals. I’ll just keep doing it. Similarly, the moral stance of not helping troubled real estate developers because they cause moral hazard is also unhelpful. The immediate danger facing China today is the risk of systemic infection.
5 reasons why China should still be considered a developing country
Third, the economy is a system due to the emergence of unpredictable patterns resulting from billions of interactions between economic agents. One such pattern is debt deflation. As in the case of China before the pandemic, economies with very high debt levels experience negative shocks such as: Zero corona policy and various regulatory enforcement For technology companies, it would induce businesses and households to deleverage or pay down debt, even if interest rates were lowered.
Personally, the rational decision to deleverage creates the overall macroeconomic impact of deflation. Deflation increases the future value of debt, causing further deleveraging and deflation. This self-reinforcing dynamic runs contrary to the self-correcting dynamics predicted by most rational choice economic models.
Once the power relationship of debt deflation takes hold, great efforts are required to break it. Japan’s debt deflation has continued for more than 20 years. If China does not heed the lessons from Japan’s experience, it is not inconceivable that the current economic slowdown could be prolonged and its ambitions to become a middle-developed economy by 2035 delayed.
Donald Low is a Senior Lecturer and Professor of Practice and Director of Leadership and Public Policy Executive Education at the Hong Kong University of Science and Technology.
