China, often perceived as an economic powerhouse, is increasingly showing signs of deflation. The government under Xi Jinping has initiated measures to counteract these economic troubles. Yet, are these actions timely enough?
Contents
The Unfinished Towers of Ambition
In the depths of Tianjin resides the Goldin Finance 117, which was meant to be the tallest unfinished building globally. Rising nearly 600 meters, its framework is sadly subject to the whims of nature, an exposed symbol of halted ambition. Similarly, in Shenzhen, the World Trade Shenyang International Center was poised to follow closely behind the iconic Burj Khalifa in Dubai. Alas, financial setbacks led to a suspension of its construction.
Buildings like these echo economic fortunes. The Empire State Building, once nicknamed the “empty state building,” stood as the world’s tallest for some 42 years. However, its occupancy suffered initially due to the Great Depression of 1929.
China’s Deflationary Dilemma
The concept of a “deflationary spiral” entails a relentless cycle of falling prices and a shrinking economy. Regal financiers and publications like [Bloomberg](https://www.bloomberg.com) and the [Wall Street Journal](https://www.wsj.com) warn that such fate may befall China. China’s GDP deflator has remained negative through a worrying series of quarters up to April–June 2024.
The Real Estate Quandary
As housing bubbles burst, China’s macroeconomic health is put to the test. The infamous revelation came from Kenneth Rogoff of Harvard University, who pinpointed the issue in “Peak China Housing,” published in August 2020. Soon after, developer Evergrande Group’s fiscal difficulties surfaced, indicating a broader real estate collapse.
Yet, housing isn’t the lone culprit. Both public and private investments amorphously expanded, overshadowing consumer expenditure. From their start in 1998, Chinese expressways reached a staggering 177,000 kilometers by 2022, enough to envelop the globe multiple times.
A Tale of Oversized Ambitions
China’s high-speed rail network has likewise unfurled dramatically since 2008. Yet, profitability is confined to the Beijing-Shanghai connection, and debts have soared beyond comprehension. The China State Railway Group Company sits on a daunting 6 trillion yuan debt.
Government Action (or Inaction?)
With fiscal strategies still evolving, the Xi administration has been in something of a quandary. The longstanding policies of reform and open markets, once a hallmark under Deng Xiaoping, faced reversal. These policies desperately need a revamp amidst swelling debts and stalling economic growth.
However, glimmers of action emerged as Yi Gang, a former governor of the People’s Bank of China, advocated for measures against deflation. The bank reduced short-term interest rates and the reserve ratio, albeit modestly.
Lessons from History
Historical parallels abound. The Great Depression, which once hollowed out tenant skyscrapers, trimmed the US GDP sizably. In more contemporary terms, global recessions like the 2008 crisis yielded a modest 0.1% shrinkage in 2009 globally.
Japan’s “lost decades” are a reminder: ill-managed bubbles lead to long stagnation. Like Japan, China’s GDP share is shrinking; it stood at 18.3% in 2021 but decreased to 16.9% in 2023. Much like the nippon experience, China must heed the lessons of Keynesian economics: reign in the bubble and embrace fiscal prudence.
The Responsibility That Lies with Xi
Much rests on President Xi’s shoulders. His economic direction has been called into question. As of 2023, rapid growth has decelerated. Consequently, if China were a democracy, a political change might arguably have ensued.
In conclusion, while a true economic collapse of post-war magnitude is absent, China faces an economic labyrinth. It necessitates bold action to deflate or refuel national ambitions.
(Originally published in Japanese. Banner photo: The Goldin Finance 117 stands tall yet unfinished in Tianjin, China. © Kyōdō.)
