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China ‘limps’ into the Year of the Dragon. Here’s why



As China ushers in the lunar Year of the Dragon, typically viewed as a period of good fortune, the nation grapples with a slew of economic challenges, denting both domestic and international confidence.

The Chinese economy faces a trifecta of woes, including deflation, a protracted housing market downturn, and a significant stock market slump. Despite Beijing’s efforts to stimulate growth through measures such as reducing bank reserve requirements and issuing government bonds for infrastructure projects, these initiatives have failed to inspire optimism among investors and consumers alike.

A crucial factor contributing to China’s economic woes is the government’s emphasis on achieving “high-quality development,” a multifaceted objective aimed at bolstering technological prowess and addressing social inequalities. However, this broader focus has diverted attention from addressing deteriorating growth, exacerbating structural and long-standing issues within the economy.

Deflation has emerged as a top concern, with prices for goods and services experiencing a continuous decline. While China’s GDP expanded by 5.2% in real terms in 2023, nominal growth, which holds greater significance for businesses and investors, slowed to 4.6%, marking its slowest pace in nearly four decades. The GDP deflator, a comprehensive measure of prices, has witnessed a persistent decline, particularly in the manufacturing sector, where businesses are forced to reduce prices amid sluggish demand both domestically and internationally.

The ongoing slump in the property market remains a significant drag on China’s economy, despite efforts by the government to curb speculation. Construction activities, a vital driver of economic growth, have faltered, weighing on related sectors such as household furnishings and cement production. Lingering uncertainty surrounding the property market has dampened consumer confidence, leading households to curtail spending on non-essential items.

Calls for additional stimulus measures have grown louder, with government advisers urging Beijing to adopt more robust interventions. However, recent efforts, though welcomed for their flexibility, have fallen short in scale and scope compared to previous interventions. While policymakers have signaled a willingness to support the housing market and prioritize economic growth, they remain cautious about resorting to excessive stimulus measures or inflating demand for housing.

Persistently low confidence levels among households and businesses continue to undermine the efficacy of stimulus measures. Lingering uncertainties stemming from pandemic-related disruptions, regulatory crackdowns, and geopolitical tensions have eroded trust in the economic outlook, prompting individuals and businesses to adopt a conservative approach towards spending and investment.

The outlook for China’s economy remains clouded by uncertainty, with both optimists and pessimists offering contrasting views on the path ahead. While some anticipate a recovery in confidence as recent challenges subside and diplomatic relations improve, others remain wary of prolonged effects from the property market slump and external factors such as geopolitical tensions and global economic conditions.

Amidst concerns about the economy’s trajectory, China’s stock market has witnessed a significant downturn, reflecting investor apprehensions about the country’s economic prospects. Efforts by policymakers to shore up market sentiment through regulatory adjustments and potential stock purchases are unlikely to yield sustainable gains without a corresponding rebound in economic growth.

As China grapples with its economic challenges, restoring confidence and charting a path towards sustainable growth will require a delicate balance of policy interventions and structural reforms to address underlying weaknesses and foster long-term resilience.

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