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China’s Policy Paralysis

An overly indebted Chinese economy cannot afford to roll out a massive stimulus, even when confronting the possibility of a full-blown property-market crisis. China thus faces a much slower growth trajectory for the foreseeable future, unless policymakers can successfully implement consumer-led rebalancing.

NEW HAVEN – Economist Min Zhu, speaking at a World Economic Forum panel in China in late June, was among the first to hint at China’s underwhelming post-COVID policy stimulus. Zhu, a former deputy managing director of the International Monetary Fund, as well as a former deputy governor of the People’s Bank of China (PBOC), is no casual observer of the Chinese economy and its role in the world. He is also one of my oldest and wisest friends in China, and I have learned to take his views very seriously.

Zhu’s prediction has proven to be accurate. Despite a promising snapback after the abrupt zero-COVID exit, China’s economic rebound has faltered in recent months. Many had hoped that the government would respond to this shortfall and introduce another large-scale stimulus package, as is its usual practice. Yet a series of announcements in mid-August from the PBOC, the China Securities Regulatory Commission (CSRC), and the State Council has dashed those hopes.

The PBOC guided short-term lending rates only marginally lower, while the CSRC focused on enhancing market mechanisms, including longer trading sessions, reduced brokerage fees, and support for stock buybacks. The State Council, for its part, scrambled to slow the carnage in the property sector, as Country Garden faces liquidity pressures and Evergrande filed for bankruptcy protection in the United States.