Weekly Business Insights from Top Ten Business Magazines | Week 302 | Shaping | 1

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Week 302 | June 23-29, 2023.

China’s economic recovery is spluttering. The prognosis is not good

There are lessons from Japan’s long stagnation

The Economist | June 22, 2023

Listen to the Extractive Summary of the Article

When the Chinese government abruptly abandoned its zero-covid policy at the end of 2022, all bets were on a rapid economic rebound. After nearly three years of restrictions, the world’s second-largest economy would, the thinking went, come roaring back.

In the event, China has reopened with a whimper, not a bang. A range of economic indicators, including retail sales and investment, have risen less rapidly than expected. Some analysts now think the economy might not have grown at all during the second quarter. At this rate, the government’s modest GDP target, for growth in 2023 of 5%, will only just be met.

There are several reasons to be gloomy about China’s economic prospects, from America’s export controls on advanced semiconductors and skittish foreign investors, to President Xi Jinping’s crackdown on big tech firms. But the main culprit for the recent weakness is property, which before the pandemic was a crucial source of growth across the economy. Activity slowed and now the danger is that the property bust now becomes an enduring malaise.  The end of the long property boom has hurt the economy in several ways. Including many businesses in China use property as collateral for their borrowing, so it is likely to have cooled private investment, too.

Property bubbles rarely end well. America’s last housing blow-up set off a global financial crisis. But the most instructive comparison for China today is Japan in the 1980s.  When Japan’s asset-price bubble burst at the end of 1989, growth slowed dramatically. Firms and households, burdened by debt, paid off their liabilities rather than spending on goods and services. Together with a shrinking workforce, this meant that Japan’s gdp growth lagged behind the rest of the rich world.

Unfortunately, China looks as if it may repeat the same mistake. The government remains fond of directing stimulus to investment, rather than towards handouts. Although Chinese leaders’ fanfare about “common prosperity” raised hopes that a more equal distribution of income could raise consumption, the share of household spending in GDP is 38%, well below the global average of 55%. In the past six years it has not increased.  Hence even if China wanted to foster more consumption-led growth, it would not easily be able to do so. 

3 key takeaways from the article

1. Abruptly abandoning its zero-covid policy at the end of 2022, China has reopened with a whimper, not a bang. A range of economic indicators, including retail sales and investment, have risen less rapidly than expected. 
2. The main culprit for the recent weakness is property, which before the pandemic was a crucial source of growth across the economy. Activity slowed and now the danger is that the property bust now becomes an enduring malaise.
3. The most instructive comparison for China today is Japan in the 1980s.  When Japan’s asset-price bubble burst at the end of 1989, growth slowed dramatically. Firms and households, burdened by debt, paid off their liabilities rather than spending on goods and services. Together with a shrinking workforce, this meant that Japan’s GDP growth lagged behind the rest of the rich world.  Unfortunately, China looks as if it may repeat the same mistake.

Full Article

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Topics:  China, Gross Domestic Product, Property