Zongyuan Zoe Liu
In late September, after months of missing post-pandemic growth targets, the Chinese government began rolling out a broad set of economic stimulus measures. So far, these have included stock market support, monetary policy easing, the recapitalization of large state-owned banks, and some limited fiscal stimulus. The total amount and specifics of the fiscal stimulus will be revealed after the U.S. election, following the National People’s Congress Standing Committee meeting in early November, but Vice Finance Minister Liao Min has described it as “quite large scale.” By unveiling these measures, Beijing has finally acknowledged what the Chinese people and the world have known for some time: the Chinese economy is in deep trouble. The “China Dream”—Chinese President Xi Jinping’s vision of doubling the size of the economy by 2035 and achieving broad-based prosperity—is slipping away. But will the stimulus work?
China’s most pressing short-term economic challenge is weak domestic demand, driven by a lack of consumer confidence. When Chinese consumers refuse to spend, they hoard cash, creating a savings glut that, coupled with government overinvestment in politically favored industries, exacerbates China’s most serious long-term structural issue: industrial overcapacity. As I argued in Foreign Affairs in August, the mutually reinforcing dynamics of flagging domestic demand and industrial overcapacity form an economic doom loop that China must escape to avoid stagnation. China’s leadership says the latest stimulus is meant to boost consumption. By largely excluding direct assistance to households as part of its stimulus plans, however, the government has demonstrated that it is still clinging to its old economic playbook of state-directed investment.
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