The economy seems closer to stabilization as policy makers take measures to halt the slowdown amid the ongoing trade negotiations with the United States.
China's economy is slowing, but there are emerging signs of stability. Policy makers are taking the slowdown seriously. In recent weeks, the government has taken measures to prevent further deceleration and shift the economy to a slightly stronger path. Some analysts make a living adding up all these measures and generating a measure of "policy stimulus," and by such metrics the authorities have done a lot. Similarly, we expect the economy to show clearer signs of improvement by the summer of 2019.
We are not willing to join the ranks of the China bears who think disaster is just around the corner.
As the Chinese economy grows in size and sophistication, the policy challenges will mount. The chance of a policy mistake will rise, especially because of the growing disjunction between economic needs and policies being implemented. On the other hand, we are not willing to join the ranks of the China bears who think disaster is just around the corner. China has major challenges and the risks are rising, but we don't expect China to spark a global recession.
Resuming trade talks
These economic risks include the trade conflict with the United States and China's high investment ratio. The trade spat raises doubts about China's export capacity over the short and long terms. And China can't be confident about Trump's response to the offers that it is placing on the negotiating table. Still, it is an opportunity for China because it allows reformers in President Xi Jinping's government to advance their agenda.
Lacking a social safety net
China's high levels of investment — without the corresponding increase in domestic consumption — is a key risk because of the close relationship between investment and savings. The difference is the current account: A country that invests more than it saves has to import capital, and a country that saves more than it invests has to export the capital. The focus of China skeptics is often on investment, but we could describe China as a country with a whole lot of savings, rather than a country with a whole lot of investments. If you think China's problem is that it invests too much, then you spend too much time worrying about government policies on investment and the exchange rate.
But what if China's "problem" really is that its households save too much? The country ends with far more capital than it can productively invest. All sorts of factors go into the decision households make about saving. Age, income, wealth, and uncertainties all play a role. China embarked on economic reforms without private wealth. The reforms also damaged the social safety net — the iron rice bowl — that was administered through rural communes and urban state-owned companies. China's one-child policy has also lowered the savings capacity. Globally, having children is one of the most important ways to save. When households began to earn wages through the market, they started to save to build wealth and to insure themselves against uncertainty.
The government has also restricted the type of savings consumers can access, leaving households with few options other than low-return bank deposits. These problems have only eased slightly. There is no social safety net, and uncertainty remains high.
Boosting consumer spending
For consumption to grow faster than income, the rate of saving has to decline. For consumption to grow at the same pace as income, the rate of saving has to remain unchanged. This point is largely lost in most commentary on China. A serious set of policy initiatives designed to shift the economy to a path of greater reliance on domestic consumption spending would have to address the incentives households face to save.