China may have to slow down in the superpower race and tackle domestic problems
fire. While consumer sentiment appears to be gradually reviving, it remains below its levels in 2019. Excessive household savings that had once found their way into fixed assets have not switched to consumption, a caution that may be derived from the negative ‘wealth effect’ of depressed real estate value.
On a longer-term basis, China’s demographic decline has reached alarming proportions, a disastrous consequence of its multi-decadal one-child policy. Youth unemployment is so large now that Beijing has refused to publish figures. A high level of unemployment at a time when the country’s population has peaked suggests that growth estimates may be exaggerated.
There is also a severe crisis of confidence among private businesses and consumers. The Chinese renminbi has reached its lowest point since the Global Financial crisis at 7.3 RMB to $1. Some experts argue that if the RMB were a free-floating currency with free capital flow features, it would have declined much further.
Yet, it may be premature to declare a permanent and meaningful slowdown in China. Beijing can lean against this with both monetary and fiscal policy. It has resorted to a bunch of half-measures that have permitted the situation to hold a line.
However, in the face of a substantial public debt burden, China is reluctant to dramatically ease policy. It is fast approaching the point where it may have little choice but to do so. Despite this, China’s free-wheeling spending on geo-strategic projects in its superpower race may need to be curbed.
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