China’s economic recovery is balance sheet constrained

THE Chinese economy is beset by Covid-19 lockdowns, a housing sector correction, depressed consumer demand and weak business confidence. China’s growth targets for the year, already low by historical standards, are unlikely to be achieved. Given the scale of the economic challenges facing China, the policy response has been unexpectedly subdued.

The approach of Chinese policy-makers to the mounting economic problems has been incremental and reactive. The government has announced a series of modest policy measures to stabilise the economy, including business tax rebates, infrastructure investment, support for lending to small businesses and targeted consumption incentives. The primary focus of these efforts, as with previous rounds of stimulus, has been to bolster the economy from the supply side.

China’s leaders hope that ramping up infrastructure spending and cutting fees and taxes for businesses will restart economic growth. However, depending on what is included, China’s current stimulus is only a modest increase in spending relative to 2021 and significantly below 2020 levels.