Will Chinese stimulus be a game changer? – 02/10/2024 – Solange Srour
China announced a significant economic stimulus package, generating euphoria in some markets and hope in others. With inflation at extremely low levels, authorities promised more measures to eliminate the risk of not meeting the 5% growth target.
The relevant questions now are two. Can the risk of the country facing a stagnation similar to that of Japan, marked by deflation, be avoided? How important is this turn in economic policy for the rest of the world, especially for commodity exporting countries?
The comparison with Japan is inevitable. The Chinese GDP growth rate, which between 1980 and 2010 was around 10%, is expected to fall to approximately 4% in the next five years, according to the IMF. In Japan, the drop was of similar magnitude, with average growth going from 7.25% between 1946 and 1990 to just 0.8% between 1991 and 2023. The country is not only a model to be avoided but also brings important lessons about what should or should not be done.
Aggressive fiscal and monetary stimuli were used, mainly from 2012 onwards, while structural reforms were left aside, without changing the low average growth. Could this be the same fate as China?
Indeed, the reductions in interest rates and the large injections of liquidity into the real estate and stock markets were surprising measures. However, the tax part to be announced is still unknown.
Like Japan in the 1990s, Beijing has so far been cautious about using a comprehensive fiscal stimulus, as it did in 2009-2010, when the boost was on the order of 12% of GDP. This caution is understandable, as the debt-to-GDP ratio today is around 85%, almost three times what it was back then (33% in 2009-2010).
Structural reforms are the biggest challenges for China, which is facing a demographic problem and falling productivity. Actions to support the private sector have been more rhetorical than substantial, particularly with regard to reducing government restrictions and interventions. Without reforms in social security (including pension and health), necessary to reduce excessive savings, household discretionary consumption is restricted.
Without a substantial fiscal package in the short term, it will be difficult to maintain growth expectations of around 5% in the coming years and sustain higher commodity prices. So far, the measures already announced and the expectation of what is to come have already given a strong boost to Chinese assets and the price of some commodities, such as iron ore and steel.
For Brazil, it will be essential to know the Chinese government’s willingness to make domestic consumption the source of GDP support and whether the crisis in the real estate sector will be stopped.
Our commodity exports have been increasingly important for growth, revenue and the generation of a high trade flow. In a scenario where the economy is moving sideways here, both due to high domestic interest rates and the global slowdown, it will be difficult for us to take the necessary measures to contain spending at the same time that we may see a drop in revenue.
With Chinese stimulus, perhaps we will be able to push forward the negative impacts of our fiscal imbalances, as we did between 2010 and mid-2014. But one day the bill will arrive, as it did in 2015.
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