Opinion

 

Andy Xie

 

A US$1 trillion property bailout is the last thing China’s economy needs

 

 

 

Andy Xie

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China is right to ignore the International Monetary Fund’s proposal that the government bail out the country’s property sector, a plan estimated to cost US$1 trillion. Stimulus right after a bubble deflates only risks reviving that bubble – as seen in the United States after 2008 – and seeding a greater catastrophe.

 

If China had a trillion dollars to spare, it should spend it instead on attracting talent from around the world to help build the country’s technological independence and, eventually, supremacy, which is essential to its long-term prosperity.

 

China’s economy is slowing down because a big property bubble has deflated. New residential sales are likely to decline by about 3 trillion yuan (US$419.85 billion) this year, over 2 per cent of gross domestic product and down by nearly 10 trillion yuan from the peak in 2021. Diminished revenues at property developers will cascade down to local government budgets and revenues in the financial system, especially in shadow banking.

 

But there is a natural bottom to the economic slowdown. As households spend less on property, they can eventually spend more on other things, such as domestic travel. For now, the economy is slowing down because spending patterns are shifting and savings are piling up in the banking system in the interim.

 

When businesses stimulate fresh demand, the economy will revive. Domestic travel and car sales are the early success stories, attracting customers with better and cheaper offerings. For the economy to fully recover, however, other industries must follow suit.

 

 

03:11

Cheap EV alternative to Tesla and BYD takes off in small-town China

Cheap EV alternative to Tesla and BYD takes off in small-town China

 

 

Relying on stimulus right after a deflated bubble can be dangerous. The US’ great quantitative easing in 2008 ended up reviving the financial bubble and then some. More easing was needed after that to keep the economy afloat. The government borrowed more cheap money to spend on pumping up the economy.

 

As a result, the US national debt has risen to over US$35 trillion. In the past five years alone, that debt has risen by about US$2.5 trillion (roughly 10 per cent of GDP) every year. If the US tries to pull back too hard, the economy is likely to collapse. So it keeps on spending. How is this going to end?

 

The long-term growth of an economy depends overwhelmingly on productivity growth, that is, better technology. The short-term boost from demand stimulus is worthwhile only if it stimulates technological development.

 

China’s clunker-for-cash programme is a good example. With the US blocking Chinese electric vehicles and the European Union raising tariffs to slow down imports of these vehicles, China’s move to boost domestic demand for its EVs can offset the effect of the growing barriers to foreign markets. Accelerating the process of replacing internal combustion engine vehicles with EVs using financial incentives could bankroll itself, as reduced oil consumption cuts import bills.

 

Boosting green tech demand is another example of effectively targeted stimulus. Both the US and EU are blocking Chinese green tech from their markets although the world needs to make the energy transition sooner or later. China’s edge in green technology is crucial to its economic future so targeted stimulus to boost demand for it makes great sense.

 

 

18:59

Why the EU, US are concerned about China’s overcapacity

Why the EU, US are concerned about China’s overcapacity

 

 

Last year, China’s investment in solar power increased to 670 billion yuan and this year is likely to see similar spending. Costs per watt are declining, and battery storage prices are down to sharply to about 300 yuan per kilowatt-hour. Solar energy has become competitive against coal.

 

A boost in solar electricity will inevitably stress the power grid unless investments are poured in – more is needed than the planned over 600 billion yuan this year. With China’s power grid shaping up as possibly its biggest barrier in the transition to green energy, it makes sense to spend more there.

 

Indeed, ramping up green investment across the board makes great sense. It supports a critical industry that foreign powers are trying to suppress and bolsters China’s goals of achieving peak carbon by 2030 and zero carbon before 2060.

 

The green transition is China’s greatest opportunity. It can show the world how to meet climate challenges economically, expanding market opportunities for the country and enhancing its global standing.

 

China also has a security imperative to cut its oil dependency. As the Middle East becomes less stable, regional war could make supply uncertain and send prices sky high. It’s a matter of time before Beijing has to accelerate the country’s green transition to boost its economy, support cutting-edge technology and enhance national security.

 

For that, it needs to attract the best global talent to help it on its journey towards technological self-reliance. As the Chinese saying goes, pay enough and even a ghost will work your mill for you.

 

For instance, in the 1920s, the US achieved superiority in scale and efficiency but not in science and technology. That only happened after European scientists migrated there en masse, driven by two world wars. Technological supremacy can only be achieved and sustained by attracting the world’s best and brightest. China can reform and invest in its talent policies to make this possible.

 

Beijing is probably ignoring the IMF’s advice because the US’ containment policy is defining its priorities. With the US waging a tech war against China, spending a trillion dollars on an overextended property sector surely comes across as a ridiculous idea to Beijing policymakers. The same consideration was probably behind the government’s willingness to allow the property bubble to deflate in 2022. Thanks to the US containment policy, China is making all the right economic choices.

 

 

Dr Andy Xie is a Shanghai-based independent economist specialising in China and Asia, and writes, speaks and consults on global economics and financial markets