Failed Stimulus To Moneybag Diplomacy: Everything You Didn't Know About China's 'Growth Story'

The strength of China doesn’t lie only in its economic, technological or military prowess but also in its ability to create a smokescreen that would blur the vision of the outside world. Even the pandemic failed to change that.  

For example, even after the November revolution of 2022 and, Beijing’s U-turn from extreme restrictions to abrupt reopening and taking recourse under the theory of natural immunity, there was little explanation on the failures of vaccination and the death toll. 

This seemingly forced the supreme leader of a single-party regime to swallow his pride, and that was no mean thing. More so, when the leader was so fanatic about his ‘zero-Covid’ policy that he kept the citizens under a lockdown for two years. 

The establishment was expected to strike back. There were reports in Chinese social media about the disappearance of students who took part in protests. However, the issue attracted minimal global attention. 

Gullible Media

Elite global media was quick to shift its focus to the sharp rise in consumer spending in China over the last two months. “China’s ultra-fast economic recovery,” The Economist screamed on 5 February. 

The claim was premature, to say the least. Post-lockdown revenge buying has become a set pattern across the world. In most cases, the spike was temporary. In India, consumer confidence increased in a graded manner. 

Considering China was an exception, both in terms of prolonged Covid restrictions and abrupt opening, it would have been right to wait and watch. On the contrary, the internet was flooded with naïve arguments linking consumer sentiment to record increases in bank deposits. 

Banks offer barely 1.5 per cent interest on deposits, on average, in China. For better returns, households were parking nearly 70 per cent wealth in the property market till 2019. The burst of the housing bubble during 2020-22 changed that. 

According to Fitch Ratings, Chinese banks have experienced a wave of early mortgage payments during July-December 2022, leading to 0.3 per cent quarter-on-quarter decline in mortgage balance in December. 

In a desperate bid to stop the collapse of the housing sector, China has now started giving loans to 70-year-olds with repayment periods extending to 95 years!

A similar situation in the US invited the sub-prime crisis and the 2008 meltdown. Thankfully, Chinese citizens are avoiding taking housing loans. 

But, more importantly, offering easy loans is nothing but a stimulus to the sector and, that’s another U-turn from Xi Jinping’s decade-old policy of deflating the housing bubble. 

Meanwhile, the US-based advisory Capital Economics warned that soaring bank deposits “reflects a shift out of riskier assets rather than a surge in savings”.

According to them, Chinese “household wealth declined in 2022 for the first time in at least two decades” and, the recent splurging by consumers was not sustainable until other economic indicators – like exports – rebounded. 

So far, there is no news of a revival of exports either. On 16 February, the Hong Kong-based South China Morning Post (SCMP) reported a long queue of idle trucks and a record pile-up of empty containers at major Chinese ports.

The lack of demand is reflected in a dramatic meltdown of sea-freight rates. According to Freightos, China-West coast US freight rates have hit pre-pandemic levels.

Stimulus Not Working 

The critics of the Narendra Modi government never miss an opportunity to point out that Indian growth suffered in the pre-pandemic 2014-19 period compared to the UPA era (2004-14). It’s a different matter that India has been the fastest growing economy in the pre-Covid world.  

However, not many pointed out that the Chinese economy was living on a regular dose of stimulus since 2008. The policy failed to revive the animal spirit and China’s average growth was down from 9-10 per cent during 1978-2012, to nearly 6 per cent before Covid. 

In a 2019 article titled “Can China Avoid a Growth Crisis?” Harvard Business Review pointed out that barring a few exceptions, the Fortune 500 companies from the country earn 85 per cent of sales revenue from the domestic market. 

In other words, the domestic market is more critical to contemporary China than the export performance. And, if the growth suffered – both before and after the pandemic – the blame should go to less-than-expected domestic consumption. 

That calls for restructuring and reforms. It is not clear what steps China is taking in that direction. It is, however, apparent that they are going by the old playbook of offering stimulus. 

According to a 12 January Nikkei Asia article, China has been refunding value-added taxes amounting to 2.4 trillion yuan to industry. The cautious private sector “used the money to increase their (bank) deposits”. 

An unrelenting Beijing asked banks to offer easy credits to the business. Bloomberg reports record growth in credit in January. 

The authorities want industries to invest in expansion and lift overall demand sentiments. It will take time to know if force-feeding worked this time. However, a similar policy failed even in 2022, writes Zongyuan Zoe Liu in Foreign Policy. 

According to Liu, Chinese banks are masters in type lending. There are references of offering loans to corporates and then allowing them to deposit funds at the same interest rate. There are also instances of banks swapping bills with one another to inflate the loan numbers. 

Both the IMF and World Bank are sceptical about China’s medium-term growth prospects. They have also listed the stimulus. It is surprising that they didn’t flag the problems associated with such measures. 

Moneybag Diplomacy 

Would economic headwinds bring a course correction to China’s moneybag diplomacy? Unlikely, at least in the medium term. China built a huge surplus from trade and they will use that as a tool to create a smokescreen. 

The biggest example is the US. Beijing emerged as the single-largest creditor to the US ahead of the 2008 meltdown. This was the first time the US relied on a single country for so much financing.  

China reported $1.95 trillion in foreign exchange reserves at the end of March 2009. According to the New York-based think-tank, Council on Foreign Relations (CFR), 65 per cent was invested in US assets.

The portfolio included $760 billion of Treasury bonds (including short-term bills), $489 billion of agency bonds, $121 billion of US corporate bonds, $104 billion of U.S. equities, and $41 billion in deposits. 

The impacts were clear in August 2008 during the Beijing Olympics. A slight negativity expressed by Beijing about their dollar assets saw the US running helter-skelter to pacify the Chinese. The year also saw the crushing of the Tibet uprising, ahead of the Olympics. 

In a recent blog, Brad W Setser of Council on Foreign Relations (CFR) pointed out that China is once again increasing exposure to the US economy. This time they are targeting the fully-backed bonds issued by federal agencies.

“China is on track to buy around $75 billion of Agencies — likely accounting for nearly all central bank demand for Agencies and for about half of all foreign demand for Agencies,” Setser wrote.