Stay vigilant: China’s economic woes could spill over
Summary
- As trade headwinds intensify, Beijing’s consumption stimulus seems insufficient. It needs to scale back production, but the world can’t count on that. India must watch out for any dumping by China of its excess merchandise.
As a tariff-happy America under Donald Trump puts China’s export-oriented economy on notice with trade barriers, Beijing is doubling down on efforts to stimulate domestic demand. Local consumption has weakened sharply in recent years, weighed down by a property slump, a market in which much Chinese savings are parked, even as income prospects have dimmed amid a jump in unemployment.
This weekend’s stimulus package reflects those concerns. Under it, China’s government has announced dozens of small moves aimed at easing people’s financial burden and pushing fiscally strapped local administrations to clear their dues to businesses. The steps are wide-ranging, although mostly indirect and temporary, raising doubts over their efficacy.
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Among other things, they cover subsidized retail loans, wage-hike provisions and subsidies for childcare and elderly support. Some of its ideas seem like shop-level banners. It recently declared a trade-in scheme, for example, to get people swapping old gadgets for new. This is hardly the broad-based generation of demand it needs.
Beijing hopes to sustain last year’s 5% GDP growth this year too, but with trade headwinds threatening to push that target beyond reach, a fiscal thrust was a must. Accordingly, it said its fiscal deficit would widen to 4% of GDP from 3% earlier. The details, however, make the overall impact of its spending hard to assess.
Consumer confidence, which sank as China’s economy slowed, may prove hard to revive in the face of softening prices. Its price index slipped into deflation territory in February for the first time in over a year. Retail sales growth slumped to 3.5% last year, less than half the rate recorded the year before. Bank deposits are on the rise, signalling the sort of thrift that comes from income anxiety and expectations of lower price tags.
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While any kind of state expenditure can push money around to counter such weaknesses, Beijing’s moves seem bent on meeting social goals instead of optimizing outlays to achieve a bang for the buck through market forces. Its subsidy plans for childcare and the elderly address articulated needs, for instance, but may prove relatively weak as sales spurs.
Given China’s grim outlook on exports, what it requires is people buying a lot more of the stuff it has been shipping out, especially to the US.
A policy shift away from export orientation to home consumption isn’t new to China. For over a decade, Beijing has been trying to restructure its economy and reduce its reliance on overseas markets, but with little success. Its latest moves, even if they amount to sizeable outlays, look unlikely to trigger a buying boom of the scale required. Meanwhile, it is unclear if Chinese factories will churn out merchandise at the same pace. As scale-backs are painful, they will probably be a last-resort in most sectors.
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Overproduction would expose overseas markets to the risk of Chinese excess being dumped there—or sold below cost just to meet volume levels needed for the benefits of scale. The costs borne by these manufacturers, distorted as they are by hidden state subsidies, have always been opaque. So it’s not easy to spot dumping.
Yet, like other countries, India must stay alert to unfair trade practices. Sharply reduced prices of Chinese goods should raise red flags. We may need levees (or levies) to hold off spillovers from China. Ideally, Beijing should exercise self-restraint. But that’s not something we can count on. Let’s not let our guard down.
