<\/p>\n
China\u2019s President Xi Jinping.<\/p>\n
(Bloomberg) — When President Xi Jinping faced a deflation spiral a decade ago, he not only cracked down on China\u2019s oversupply problem but also unleashed an almost $900 billion housing investment boom.<\/p>\n
Most Read from Bloomberg<\/p>\n
It\u2019s a similar situation today, except Chinese policymakers are rolling out only half the solution. While Beijing\u2019s recent push to curb overcapacity is helping rein in the glut in steel and solar sectors, the \u201canti-involution\u201d campaign is missing a stimulus spark and could hurt the economy instead of bringing inflation back.<\/p>\n
\u201cIt\u2019s going to be hard to simply rerun the 2015 playbook,\u201d said Christopher Beddor, deputy China research director at Gavekal Dragonomics. \u201cThe fundamental problem is broad macroeconomic forces such as weak household demand, which probably won\u2019t be fixed by a series of haphazard government interventions to limit competition in a few industries.\u201d<\/p>\n
WATCH: Can China Avoid Japan\u2019s Lost Decades?Source: Bloomberg <\/p>\n
But more than two years into China\u2019s latest deflation saga, a mega stimulus is still off the table. Total debt has soared to over 300% of gross domestic product \u2014 from a little over 200% a decade ago \u2014 and with the main policy rate at 1.4%, China\u2019s central bank doesn\u2019t have much room to cut. Price decreases also more widespread this time around, making the task at hand more daunting.<\/p>\n
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Even so, Xi\u2019s government is finally getting serious about the over-production roiling the world\u2019s second-biggest economy.<\/p>\n
Coal output declined last month from a year ago, as government inspectors targeted sites that produce too much. A major lithium mine was suspended for three months, Bloomberg News reported earlier. Bosses from electric vehicle companies and some tech-giants have been hauled before regulators and warned about over-competition.<\/p>\n
That\u2019s slowing China\u2019s industrial engine and hurting growth. Yet what\u2019s lacking is a recipe that worked a decade ago, when China\u2019s top leaders not only curbed output to prevent prices falling too far, but also gave households a huge wallop of stimulus, unleashing an estimated 6.3 trillion yuan ($877 billion) in property investment \u2014 equivalent to almost a 10th of China\u2019s economy in 2015.<\/p>\n
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Without a big bang stimulus, economists say policymakers will need to roll out bigger structural reforms. One venue analysts are eyeing for bigger solutions is a twice-a-decade gathering of Communist Party officials known as the fourth plenum set for October, where leaders will chart development plans for the next five years.<\/p>\n
Options available to Xi\u2019s government include overhauling the incentive structure for local officials so they will chase faster consumption instead of investment and production, according to Robin Xing of Morgan Stanley, as well as reforms to transfer more income to households.<\/p>\n
Morgan Stanley isn\u2019t changing its inflation forecast for China despite the government\u2019s efforts to rebalance its economy toward consumption, according to the bank\u2019s chief China economist Robin Xing.Bloomberg: The China Show.\u201d <\/p>\n
Addressing the problem is important for China\u2019s domestic growth and its geopolitical relationships, as US tariffs currently above 50% curtail access to the world\u2019s biggest consumer market.<\/p>\n
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Xi\u2019s last battle with overcapacity showed the limits of capping production alone to fix the problem. In 2015, as the economy also grappled with a stockpile of unsold homes and deep factory-gate deflation, authorities doubled down on an experiment first pioneered by former Premier Li Keqiang in northeast China in the 2000s.<\/p>\n
Under that \u201cshantytown redevelopment program,\u201d the People\u2019s Bank of China provided over 3 trillion yuan worth of cheap loans to help local governments and developers tear down old homes and provide families with cash compensation. Households took on debt to buy new apartments.<\/p>\n
Such stimulus accounted for 60% of price increases in coal and steel, playing a more important role than mandated capacity cuts, according to a study by the International Monetary Fund in 2018.<\/p>\n
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Fast forward to now, Xi\u2019s economic lieutenants have several levers they could pull to fire up demand despite the constraints.<\/p>\n
Chief among these is the option of propping up a property market still in distress after a crisis started in 2021. So far, efforts to encourage local governments to buy unsold homes to support real estate have largely failed, prompting officials to consider enlisting companies owned by the central government in Beijing for the task, Bloomberg News reported earlier.<\/p>\n
What Bloomberg Economics Says…<\/p>\n
\u201cReducing overcapacity in certain industries could temper the price wars, but worries about the impact on growth and employment will give policymakers pause. A more viable path forward would be to focus on lifting demand through more income and job support.\u201d<\/p>\n
\u2014 Eric Zhu. For full analysis, click here<\/p>\n
Officials might also act with less restraint in stimulating consumer spending. There are more ways for the government to transfer income to the household sector without discouraging work, a key concern for the Communist Party, according to Adam Wolfe, an emerging markets economist at Absolute Strategy Research.<\/p>\n
The government could achieve that by raising rural pensions, reducing employees\u2019 health insurance contributions, or implementing a negative income tax for those earning below a certain threshold. Subsidies for families with young children could also become more generous, he said.<\/p>\n
\u201cSo far, the macro response remains well short of the monetary and fiscal stimulus that pulled China out of its last deflationary slump in 2016,\u201d Wolfe said.<\/p>\n
With the launch of massive dam construction in Tibet, speculation also is rife over a big infrastructure push to boost demand. But such big projects take years to plan and execute. And decades of urbanization have already left China saturated with bridges and roads.<\/p>\n
<\/p>\n
Beyond the imbalance of abundant supply and dormant domestic demand, a deeper issue is over-competition among local governments in pursuit of growth driven by investment and production, especially in sectors favored by top leaders.<\/p>\n
Subsidies offered to industries in the form of cash, tax benefits, cheap credit and land add up to an estimated 4% of GDP per year, according to a recent IMF study. But maintaining employment and tax income is a high enough priority for officials to keep unprofitable companies \u2014 and even zombie firms \u2014 alive.<\/p>\n
China needs to \u201cshift the tax system towards one that rewards efficiency and income, and change the local government incentives from rewarding output to household well-being,\u201d Morgan Stanley\u2019s Xing told Bloomberg TV.<\/p>\n
\u201cIf they use the five-year plan in the fourth plenum to address these issues, I think finally these pieces will fall into place\u201d and lead to a rebound of inflation, he said.<\/p>\n
–With assistance from Ocean Hou, Yvonne Man and David Ingles.<\/p>\n
(Updates with new chart.)<\/p>\n
Most Read from Bloomberg Businessweek<\/p>\n
\u00a92025 Bloomberg L.P.<\/p>\n","protected":false},"excerpt":{"rendered":"China\u2019s President Xi Jinping. (Bloomberg) — When President Xi Jinping faced a deflation spiral a decade ago, he…\n","protected":false},"author":3,"featured_media":166163,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[12],"tags":[3638,57039,64,74,79,454,13201,67,132,68,11762],"class_list":{"0":"post-166162","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-economy","8":"tag-bloomberg","9":"tag-bloomberg-news","10":"tag-business","11":"tag-china","12":"tag-economy","13":"tag-government","14":"tag-morgan-stanley","15":"tag-united-states","16":"tag-unitedstates","17":"tag-us","18":"tag-xi-jinping"},"share_on_mastodon":{"url":"","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/166162","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/comments?post=166162"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/posts\/166162\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media\/166163"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/media?parent=166162"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/categories?post=166162"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/us\/wp-json\/wp\/v2\/tags?post=166162"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}