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Business News/ Economy / From deflation to high debt burden: Here's 5 things happening in Chinese economy

From deflation to high debt burden: Here's 5 things happening in Chinese economy

  • The economic crisis in China has significantly impacted major developers, deterred investors, and raised concerns about the possibility of widespread economic repercussions

A crossing guard guides the flow of traffic near the Ping An International Financial Center in Beijing, China

China is facing the challenges of an economic deceleration and a substantial debt crisis within its real estate industry. The economic crisis has significantly impacted major developers, deterred investors, and raised concerns about the possibility of widespread economic repercussions. The impact of sluggishness on China's economy is not restricted to the country as it is causing unexpected ripples in obscure corners of Europe's high-yield credit market.

There are several questions unanswered about the Chinese economy at the current stage as President Xi Jinping mulls over rare policy changes like increasing the budget deficit which was increased to its most substantial scale in three decades. The country introduced a sovereign debt package that signaled a departure from its conventional fiscal support framework.

5 things happening in the Chinese economy

1. Deflationary Pressures- The deflation pressure of the country returned in October casting doubts over the economic recovery. Last month, consumer prices experienced a 0.2% decline following a period of close proximity to zero in the preceding two months, as indicated by data released on Thursday from the National Bureau of Statistics. Moreover, the price levels on the side of producers continued their decline for the 13th straight month as they dropped 2.6% during October.

“Combating persistent disinflation amid weak demand remains a challenge for Chinese policymakers," Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Ltd told Bloomberg. “An appropriate policy mix and more supportive measures are needed to prevent the economy from a downward drift in inflation expectations that could threaten business confidence and household spending."

2. Better growth forecasts- Despite a slowdown, the future doesn't look very bleak for the Chinese economy as recently the International Monetary Fund (IMF) forecasted 5.4% growth in China's economy this year. This was an upward revision from an earlier forecast of 5% as the IMF believes that the Chinese economy has made a sharp post-Covid recovery.

"We have revised up growth by 0.4 percentage points in both years relative to our October WEO projections, reflecting stronger than expected growth in the third quarter and the new policy support that was recently announced," IMF's First Deputy Managing Director Gita Gopinath said in Beijing.

3. High local debt- The local government debt risks continue to remain high in China as it reaches 92 trillion yuan ($12.6 trillion). This is 76% of the economic output of China in 2022 and is a significant increase from 62.2% in 2019. The government claims to be working to resolve the issue of high local debt and the IMF has also recommended a comprehensive restructuring strategy.

"The central government should implement coordinated fiscal framework reforms and balance-sheet restructuring to address local government debt strains, including closing local government fiscal gaps and controlling the flow of debt," said Gopinath.

4. Weak Investments- In the first nine months of 2023, the investments in fixed assets in China were at their slowest pace since 2020. The investors were anticipating that the easing of COVID-19 restrictions would fuel robust economic activity in the world's second-largest economy. However, contrary to expectations, persistent economic stagnation and escalating political tensions with the US are giving rise to lackluster returns and a sense of uncertainty regarding future developments.

5. Government measures- China's President Xi Jinping has announced several measures to pull the economy from sluggishness. The government not only revealed the largest headline deficit in thirty years but also introduced a sovereign debt package, signaling a departure from its conventional fiscal support approach. The injection of one trillion yuan ($137 billion) into the budget, coupled with a willingness to surpass the longstanding 3% limit for the deficit-to-GDP ratio, reflects Beijing's resolute stance to bolster growth for the year 2024 and avoid complacency.

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