13 Feb 2024 | News & Feature

Global Macro Panorama, Part 2 – China: Trampled under Thucydides Global economic outlook in the shadow of US-China struggles

  • China has been going through an acute real estate crisis, which—coupled with disruptions from the pandemic—has depressed household income and consumption. Unlike a typical "Western" approach, however, the Chinese authorities have been far less willing to provide bailout or handout, instead implicitly tying demand-side recovery on supply-side improvement.
  • Criticisms of China’s inadequate stimulus typically cite its tepid rate cuts and its relative reluctance to expand fiscal spending. A peek under the hood, however, reveals that China is engaged in a "QE-like" operation, albeit one where the central bank’s balance sheet expansion provides a direct boost for bank lending.
  • Massive financing flows into manufacturing is dictated by a combination of (1) China’s need to avoid monetary contraction and the ensuing debt-deflation cycle, (2) lack of appetite to lend to property and other tertiary sectors, and (3) the authorities’ own strategic priorities amid its competition with the West.
  • This financial boost has helped China make strong inroads into high-tech sectors, especially EVs and renewables—without which, the GDP would have only grown by 3-4% in 2023. For less complex and more labor-intensive industries, however, this wave of financing acts more as a large-scale subsidy scheme, to compensate for declining profits due to falling factory-gate prices.
  • China’s monetary expansion has inadvertently driven global disinflation, by spurring industrial output much faster than its domestic consumption growth. This supply-focused strategy can only be sustained through exports—making China’s recovery contingent on continued strength of global demand and/or loosening of global liquidity.