China is ‘entering balance sheet recession’, says economist

When China abandons its heavy blockade”no COVID“policy at the end of last year, it was widely disseminated forecast that the nation’s economy will boom as trade and tourism return to normal. But in the months since, consumer spending has anemiareal estate market—has been labeled as “time bomb” —continues to struggle after years of over-construction, and government officials are struggling to cope with 23 trillion dollars unmanageable local government debt as well as rising youth unemployment.

Now, some economists fear China is headed for a kind of insidious recession that will slow its economic growth for years to come. Richard Koo, chief economist at Nomura Research Institute, the research arm of Japan’s largest brokerage and investment bank, said: “China is entering a period of balance sheet recession… who no longer borrow money. speak Bloomberg Friday.

Koo defines a balance sheet recession as a period in which consumers and businesses put more money into paying off debt rather than spending or investing. The economist developed the concept of a balance sheet recession based on Japan’s “Great Recession” that began in 1990 and ushered in what many call the “lost decade” of Japan. country—a period when economic growth was consistently below the developed-country average and deflation was a constant threat.

Koo argues that when a balance sheet downturn occurs and businesses shift from the typical goal of maximizing profits to minimizing debt, that could slow economic growth to near levels. like deadlock. According to the economist, this balance sheet recession was the main reason that Japan fell into the period of low economic growth and low inflation in the 90s, as well as the slow recovery from the financial crisis. global financial crisis in 2008.

Koo’s concerns about China’s future are not unfounded. China Beige Book’s latest survey, using proprietary data to better understand sometimes’s health obscure China’s economy showed that domestic national borrowing fell to its lowest level since 2010 in the second quarter, CNBC fifth report. Koo writes of the data: “The fact that companies – which should have borrowed and expanded – are not doing so shows that entrepreneurs are worried.

While the US Federal Reserve and many other central banks around the world are raising interest rates to combat inflation, China is going the other way. Inflation is not a domestic problem—an annual increase in consumer prices is just 0.2% in May – but slowing economic growth is becoming one. That led the People Bank of China last interest rate cut Augustand again this monthin the hope of boosting demand for goods and services.

Despite the rate cut, China’s property market continues to show weakness in the latest China Beige Book survey, with brokers reporting declines in both sales and prices. . And new Purchasing Managers’ Index (PMI) data released on Friday by China official statistical office showed the manufacturing sector contracted for the third straight month in June. The non-manufacturing sector also weakened, with PMI falling from 54.50 in May to 53.2 in June, but remaining above the key 50 threshold indicating contraction.

Employment also fell in both areas, which is bad news for young Chinese struggling to make ends meet. high sky unemployment rate for many years. Although China’s overall unemployment rate was just 5.2% in May, the unemployment rate of 16-24 year olds hit a record 20.8%.

According to Nomura, the good news is that the Chinese government is well aware of its economic problems and is taking steps to solve them.

“There has been talk of a balance sheet recession in China – that was not the case in the US in 2008 or Japan in 1990. The main difference is that now doctors know the disease is,” he said. What. “If the government comes up with quick, adequate and sustained fiscal stimulus measures, there is no reason for China’s GDP to collapse.”

However, while China has been able to use fiscal stimulus to boost economic growth in the past, this tactic has also led to oversupply problems in the property market and exacerbated the problem. more local government debt is on the rise—it’s a double-edged sword for the economy. That could mean President Xi Jinping’s options to stimulate the economy are limited.

Keyu Jin, a professor of economics at the London School of Economics, said: “We are in a vicious circle in the sense that you need a large stimulus to make a moderate impact. speak Bloomberg Friday.


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