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Why Hasn’t China Rushed to Bail Out Its Economy?

The Chinese government’s reluctance to unveil a massive stimulus package despite the ongoing economic slowdown has puzzled foreign observers and the Chinese public alike. One possible explanation for the Chinese leadership’s cautious approach could be the huge debt overhang from the 2008 crisis.

SHANGHAI – China’s aggregate demand has weakened significantly over the past three years. In addition to the enduring effects of China’s anti-COVID policy, the country has also been weighed down by the decrease in global demand. Exports fell by 14.5% year on year in July, a stark contrast from the robust 17.2% export growth recorded in July 2022. Given these downturn pressures, the government’s reluctance to announce a massive stimulus package, as many had anticipated, has left foreign and Chinese observers deeply perplexed.

While China’s leaders are certainly aware of the ongoing economic slowdown, they may be estimating that the risk of a bailout is worse than the risk of inaction. Or perhaps they have more confidence in the domestic economy’s resilience against a global recession and believe that the economy will recover quickly on its own.

Regardless, China seems to have chosen not to take further action. In fact, China currently faces significant roadblocks to any additional economic intervention. After all, the accumulation of massive debts, particularly among local governments, has left China with limited room for maneuver. Moreover, the external environment has become increasingly unfavorable to China since at least 2018,  presenting challenges unlike any it has faced over the past 40 years