China needs to spend big, like it’s 2008 again, before the economic slowdown sets in
- David Brown says the Chinese economy needs a stronger dosage of government intervention, or growth may slow to under 5 per cent next year
- Beijing must expand the money supply, and ease credit conditions for households and companies
Business optimism is flagging in China, as corporate investment slows, dampening jobs growth and consumer demand. It is hard to see how Beijing can conjure up stronger growth over the next couple of years without a more balanced business plan. Most leading indicators underline that conditions are getting worse, not better.
Chinese consumer confidence has peaked and business optimism is dipping back into negative territory, as corporate investment slows, dampening jobs growth and consumer demand. An economic reboot is long overdue. Beijing succeeded in protecting its economy from the worst effects of the 2008 crash but it needs to do more now – more monetary and fiscal stimulus – to stop the rot. Nothing should be ruled out.
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The general thrust of monetary and fiscal policy is so far behind the curve that it is no wonder China’s economy is flagging. Annual money supply growth is running at 5.8 per cent and the underlying trend of government spending is rising in real terms by 3.5 per cent year on year, falling short of what is needed to sustain the 6.5 per cent growth of the economy. Considering that domestic credit expansion and government spending growth were running close to 30 per cent year-on-year in the wake of the 2008 global crash, it is clear more needs to be done. At the moment, Beijing’s measures look more like a policy squeeze than a recipe for solid economic expansion.
Beijing must put words into action with bigger tax cuts, increased infrastructure spending and more focused measures to lift consumer spending and domestic demand. On the monetary side, the government should give the People’s Bank of China freer rein to ease policy again. Much work must be done to ease credit conditions for households and companies, meaning additional cuts in interest rates and bank reserve requirements. Ideally, money supply should be expanding by at least 10 per cent per annum to have any chance of success.
With the economy losing so much momentum, Beijing must pull out all the stops and regain the initiative before it is too late.
David Brown is chief executive of New View Economics