How Xi Jinping can fix China’s ‘Great Recession’

AS IT turns out, reopening alone is not enough to get China’s economy back on track. Only six months after the end of Covid Zero, manufacturing is already spluttering, one in five young people are jobless, and private businesses are not investing for the future.

There is a sense that the People’s Bank of China’s (PBOC) easing measures are no longer working. In a cover story last weekend, Caixin, an influential local news outlet, asked where all the central bank’s money went. M2, a broader measure of money supply, has been growing in double digits since the Shanghai lockdown more than a year ago. But there’s been little economic growth, and no inflation.

Consumers, for one, are not taking advantage of the central bank’s lower rates on new home purchases. Rather than buying more apartments, they’re speeding up payments on existing mortgages. Private businesses don’t seem to be expanding their fixed-asset investments either. Instead, consumers and entrepreneurs are cutting down debt, and putting excess cash into bank deposits.

In its article, Caixin asked if China is starting to exhibit an unusual economic aberration that has plagued Japan. Drawing on economist Richard Koo’s works, including The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession, the magazine worried that China might be suffering from what Koo calls “balance sheet recession”, in that rather than maximising profit, most companies are busy minimising debt and repairing their balance sheets.

In a way, President Xi Jinping’s deleveraging campaign, which got underway in late 2017, has worked too well. However, this kind of risk-averse mindset is also dangerous. It renders traditional stimulus measures ineffective and takes China out of the normal rhythms of business cycles. Just look at what happened to Japan’s lost decades.

Beijing therefore needs to act now to nip China’s “Great Recession” in the bud. It’s time for top policymakers to put away the regulator hat, and learn to be investors.

Right now, the economy’s biggest problem is that there are few buyers left, leading to deflationary expectations on asset prices. Last year, amid brutal tech crackdowns, foreigners’ equity holdings tumbled by US$1.1 trillion. A recent rule overhaul of hedge funds and private equity, designed to curb trading irregularities, shrank the US$2.9 trillion industry. Last month, only two new private funds registered with the regulatory body.

With few buyers around, even fewer expect asset prices to rise over time. It is thus only rational that a business takes a wait-and-see attitude on capital investment or new hires, when its exit options and returns on equity are not clear.

Dalian Wanda Group’s recent attempt at a corporate turnaround showcases how much China has changed in the last five years. In 2017, founder Wang Jianlin managed to save his commercial real estate empire from bankruptcy by quickly selling his hotels to Guangzhou R&F Properties, and his tourism and theme-park projects to Sunac China Holdings in a deal that brought in US$9.4 billion.

Nowadays, divesting shopping malls – even in the wealthiest parts of China – is a tedious exercise. Wanda’s past saviours are going through debt restructuring themselves, while foreign investors are feeling cautious, reported Caixin. Wang is unlikely to fetch a good price.

Extreme times call for extreme measures. During the depth of the pandemic, the Federal Reserve stepped in, going all the way to purchasing corporate bonds issued by fallen angels. So why is the PBOC’s balance sheet still squeaky clean, while households and businesses are struggling? The last time the central bank broadened the range of collateral it accepts for its medium-term lending facility was in 2018.

Caixin’s cover story is a mere reflection of a hot topic that, in recent weeks, has been widely discussed among academics and investors in the mainland. Xi’s administration has been refraining from large-scale quantitative easing, but perhaps the time has finally arrived. Having scared away investors – foreign and domestic alike – the government itself has to be the buyer of last resort now. BLOOMBERG