Covid-19<\/a> pandemic or the tariffs. They\u2019re really the result of structural choices made decades ago.<\/p>\nFor a long time, the economy focused on growth above all else, channelling a large share of national income into investment, say, on building infrastructure, rather than household consumption. To make that happen, wages and household incomes were kept relatively low, which helped sustain high savings and high investment.<\/p>\n
That worked well when the investment was quite productive, but over time, it led to some problems, too. Capacity continued to grow faster than demand, and business margins thinned. Meanwhile, households didn\u2019t see their incomes or confidence grow as quickly as the economy.<\/p>\n
Even before the pandemic, growth was slowing and the economy was showing signs of what economists call a \u201cgrowth recession\u201d \u2014 still expanding, but at a slower, less healthy pace, with weak prices and hesitant hiring.<\/p>\n
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At the same time, households were saving more due to uncertainty about the future and limited social safety nets. So, the deflationary pressures and job insecurity of today are the result of long-term imbalances, brought to the surface and worsened by the pandemic and trade tensions. Addressing them will require raising incomes, improving confidence, and shifting the growth model to rely more on domestic demand.<\/p>\n
In the press release for the new GDP data, Chinese policymakers have admitted that \u201ceffective demand is insufficient\u201d. Without stronger consumer confidence and income growth, the recovery risks being export-heavy, but fragile at home.<\/p>\n
There have been some official expressions of concern about this model of economic growth. What is the incentive to move away from it?<\/strong><\/p>\nChina\u2019s export-driven growth has been incredibly successful for decades, but it has also created some serious vulnerabilities.<\/p>\n
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With the latest round of US tariffs and threats against other countries as well, it is clear that relying heavily on exports leaves the economy exposed to geopolitical risks. Internally, we\u2019re seeing what people in China now call \u201cinvolution\u201d \u2014 a cycle of extreme competition among Chinese firms, which has led to relentless price-cutting to appeal to consumers and resultant shrinking profits. That hurts firms\u2019 ability to invest, keeps wages low, and holds back domestic demand.<\/p>\n
Meanwhile, the European Union and the Association of Southeast Asian Nations (ASEAN) have already become more important trading partners for China, and they do help cushion the blow from US tariffs. We have seen exports to these regions grow in double digits in some categories, but they\u2019re not perfect substitutes.<\/p>\n
The EU is increasingly wary of Chinese industrial overcapacity and unfair competition in the form of state subsidies, especially in green tech and Electric Vehicles. ASEAN is growing fast, but its demand is still uneven and more price-sensitive than the US market. Neither can fully replace the scale and strategic weight of the US relationship.<\/p>\n
On top of that, there\u2019s growing resistance from other countries to what they see as cheap Chinese exports flooding their markets. If China keeps doubling down on this model, it risks even more trade barriers and damage to its reputation and relationships overseas. There is now a push to move up the value chain, produce higher-quality goods, and compete more on innovation than just low prices.<\/p>\n
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But making that shift is not easy or painless. Cutting excess capacity and moving away from price wars will slow growth in some industries. Prices for certain goods will go up. Some firms that have been surviving on thin margins will have to exit the market, leading to job losses. Reforming the model is clearly necessary for the long term, but it comes with real short-term costs that are hard to ignore.<\/p>\n
Why have recent government measures been considered insufficient, and could a massive stimulus be on the horizon?<\/strong><\/p>\nChina tends to approach stimulus very carefully, and usually waits to see clear signs of weakness before stepping in aggressively.<\/p>\n
Given the current economic reality, intervention is weighed against the risk of piling up too much debt, fueling another housing bubble, or creating financial instability down the road. That caution also allows them to keep some policy tools in reserve for when they really need them.<\/p>\n
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Right now, growth has actually been a little above the government\u2019s target, so they don\u2019t feel much urgency to roll out big, sweeping measures yet. What we\u2019ve seen so far<\/strong><\/a> (modest fiscal spending, targeted subsidies, some selective credit easing) has helped keep the economy on track, but hasn\u2019t addressed the deeper problems.<\/p>\nThat\u2019s why many people see the stimulus extended so far as falling short. It has stabilised things on the surface but hasn\u2019t boosted confidence among households or businesses in any meaningful way. The government seems to be holding back, waiting for more decisive evidence from the data before it commits to a larger, more coordinated response.<\/p>\n
Part of that is about conserving resources, but it\u2019s also because putting together a comprehensive package of reforms and support is politically and institutionally complicated. We\u2019ll likely see stronger measures later in the year if the data shows growth starting to slip more clearly.<\/p>\n","protected":false},"excerpt":{"rendered":"On July 15, China\u2019s National Bureau of Statistics released GDP growth numbers for the first half of the…\n","protected":false},"author":2,"featured_media":274190,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3090],"tags":[51,103777,33101,103775,3233,15882,9409,103776,1700,42805,554,16,15],"class_list":{"0":"post-274189","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-business","9":"tag-china-economic-position-explained","10":"tag-china-economy","11":"tag-china-economy-growth-rate","12":"tag-china-gdp","13":"tag-china-news","14":"tag-current-affairs","15":"tag-deflationary-pressures-explained","16":"tag-economy","17":"tag-express-explained","18":"tag-trump-tariffs","19":"tag-uk","20":"tag-united-kingdom"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/114878833478214695","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/274189","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=274189"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/274189\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/274190"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=274189"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=274189"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=274189"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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