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Wang Xiangwei

“Our money is running out.” That is the constant refrain I have heard from mainlanders since the end of 2022, when China suddenly lifted the zero-Covid restrictions which had hit the economy hard.
More than a million restaurants have reportedly shut down across the country in the first half of this year, close to the total for the whole of last year as consumers scaled back their spending. Retail sales rose only 2.1 per cent year on year in August despite the summer travel peak, down from a rise of 2.7 per cent in July.
Pessimistic sentiment among businesses is widespread. Industrial output grew 4.5 per cent in August, slowing from 5.1 per cent in July, while industrial profits suffered the biggest slump this year, plunging 17.8 per cent.
Local governments, which largely rely on shrinking land sales for revenues, have now resorted to arbitrary fines on businesses. Non-tax revenues nationwide surged by 12 per cent in the first seven months this year.
At first glance, these episodes combine to paint a picture of gloom and doom, but that is just half the story. According to government data, household deposits rose to a record 146.3 trillion yuan (US$20.8 trillion) at the end of June. That was bigger than the market capitalisation of the mainland stock market of 73 trillion yuan and China’s gross domestic product of 126 trillion yuan.
The real issue is not a lack of money but a lack of confidence to spend the money. More importantly, people have been perplexed by the total lack of clarity over the thinking of China’s leadership on how to move forward with the world’s second-largest economy.


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Ever since the end of 2022, expectations have been mounting on the country’s leaders to unleash a bold stimulus programme to fire up the economy and prevent a slide into Japanese-style stagflation. In 2008, China’s leaders fired a “big bazooka” during the global financial crisis.
The current leadership had resisted calls for stimulus despite obvious signs of an ailing economy. That was until late last month, when Beijing suddenly made another major policy shift and released a series of bold measures to restore confidence. The size of the stimulus caught many people by surprise and triggered a rally in the mainland and Hong Kong stock markets, as well as China-linked stocks in the United States.
Before we understand the reasons behind the sudden change of heart and its ramifications, it is interesting to explore why the country’s leaders dragged their feet for so long.
One chief reason is that they are still smarting from the aftermath of the 2008 stimulus package, which saw the central government pump 4 trillion yuan into the economy. Adding in the investment by local governments, the stimulus package is estimated to have totalled at least 30 trillion yuan. All that money quickly revived the economy, but at the same time it contributed to enormous industrial overcapacity, wasteful projects and energy-intensive, high-pollution industries, consequences with which the government is still grappling.




Moreover, President Xi Jinping might have consolidated absolute power during the past 10 years, but the fact remains that local provincial party chiefs still wield considerable influence over local economic and investment priorities. A monetary and fiscal loosening similar to the scale of 2008 would lead to another intense round of low-quality, redundant development. Every province or municipality wants their own electrical vehicle assembly or semiconductor plants.
As a result, the government has stuck to relatively mild attempts to stimulate economic growth. In June, Premier Li Qiang publicly compared China’s economy to a patient recovering from a long illness, presumably referring to the battered economy after three years of zero-Covid controls. Citing traditional Chinese medical theory, he warned that strong medicine, presumably referring to bold stimulus, would be detrimental to the patient who instead should be allowed to recover slowly.
This strategy has failed miserably, though. The leadership’s intention to fix long-term structural problems has been overtaken by the short-term crisis of confidence permeating in the economy. The dismal economic data in August has finally convinced the authorities to resort to the bazooka to create a feel-good factor ahead of elaborate efforts to mark the 75th anniversary of the founding of the People’s Republic of China.


What happens next? Stock market investors have whipped up another frenzy reminiscent of the bubble of 2015. The problems which prevented the authorities from undertaking bold stimulus much earlier are still present. That probably explains why the scale of this year’s stimulus package appears tame compared to that in 2008.
Still, there are concerns over whether economic growth will rebound enough to support the spectacular stock market rally. Re-energising the private sector will be the litmus test, not least because private businesses account for more than 80 per cent of new jobs and contribute 60 per cent of China’s GDP.
Confidence among the private sector has remained dismally low since Beijing’s widespread crackdown and enhanced regulatory and political constraints beginning in 2019. Since last year, however, officials have tried to court the private sector by expressing support for entrepreneurs. This support has been more rhetorical than substantive amid frequent reports of entrepreneurs arbitrarily detained or banned from leaving the country.
Taking decisive steps to stabilise the property market and inject massive liquidity into the stock markets is a much-needed shot in the arm, but only for the short term. China needs more concrete actions, including relaxing regulatory and political constraints on private firms and boosting social security benefits for low-income groups to make consumers and entrepreneurs feel confident enough to spend again.


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While short-term stimulus will help, Beijing must directly address the fears of businesses and households to get them spending again


While short-term stimulus will help, Beijing must directly address the fears of businesses and households to get them spending again.


China's economic recovery

Global monetary policy

China inflation

Global Financial Crisis of 2007-2008

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China’s economic stimulus

Expresses the views, ideas and conclusions of the author. (Eg. Enough of Crazy Rich Asians, think of crazy poor Hongkongers.)


China’s stimulus will fall short without private-sector confidence

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}While short-term stimulus will help, Beijing must directly address the fears of businesses and households to get them spending again

While short-term stimulus will help, Beijing must directly address the fears of businesses and households to get them spending again