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Adam Wolfe in FT Unhedged: China’s confidence deficit

Ella Rathgeber

21st AUG. 2023

FT’s Ethan Wu discusses China’s troubled economic situation. ASR’s Emerging Markets Economist, Adam Wolfe, shares his expertise on this matter, describing China’s challenge as rooted in insufficient confidence, rather than the increasingly popular narrative of a Japan-style balance sheet recession.

Wu highlights all the ways in which authorities have tried tackling China’s sagging demand and its teetering property sector, from cutting lending rates to extending stock trading hours. However, one strategy they have yet to employ is a fiscal stimulus boost. 

Wolfe argues that this reflects a two-part calculation: “First, the immediate problem the Chinese economy faces is one of precautionary savings sapping aggregate demand. Second, authorities fear the most obvious fix to weak demand, a dose of stimulus, might not accomplish much, partly because of an elevated savings rate.”

Wu when discussing precautionary savings, points to Keyne’s paradox of thrift for China’s soft consumption numbers: the case where precautionary high savings in a downturn hurts demand further, which encourages even more savings. ‘Wolfe thinks “zero-Covid PTSD”, including the lethally abrupt reopening process, has pushed up the savings rate, hurting demand, especially for durable goods. Even in the healthier services sector, spending has not kept pace with income growth (see Chart below)’. 

Moreover, Wu suggests that authorities aren’t confident that “big bang” fiscal spending can solve the problem. ‘Wolfe says the worry is that higher spending, such as direct transfers to households, could just end up getting saved — resulting in a low fiscal multiplier that blunts the efficacy of stimulus’.

  • To read Ethan Wu’s full article from the FT, please see: HERE (FT subscription may be required)

  • ASR clients can read Adam’s report on: A Chinese balance sheet recession?

  • If you are interested in a free trial of our research, please see: HERE 

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