China’s Good Crisis, Will Xi Address the Looming Depression and Population Collapse?

2 mins read
August 19, 2023

Current Context: As China’s economic recovery indicators waver — revealing decelerating consumer spending, industrial output slumps, unprecedented population collapse, and rising unemployment — Cai Fang of the People’s Bank of China (PBOC) underscores the urgency of boosting household consumption. This situation could offer Xi Jinping a prime chance to address several problems simultaneously.

Cai Fang, a linchpin in PBOC’s monetary policy assembly, advocates for decisive actions to ensure citizens have more disposable income. In a dispatch via China Finance 40 Forum’s social media, Cai draws attention to post-pandemic unemployment, hampering household spending. The solution? Innovative policies to stop the decline of consumer confidence.

Never waste a good crisis: A staunch proponent of direct consumer stimulus, Cai’s approach diverges from Beijing’s earlier strategy. He mooted an ambitious 4 trillion yuan ($551 billion) immediate boost for households, addressing the wage stagnation during COVID-19.  Among his recommendations is a reform in China’s household registration could supercharge migrant workers’ purchasing power.

Another easy target for such stimulus would be the fact that families in China grapple with palpable financial strains, especially those with children in compulsory schooling. The cost of raising a child between 6-14 years stands at an eye-watering 210,000 yuan ($31,021), which is 44.65% of the entire expense until 18, cites a report by the YuWa Population Research think tank. Within this group is Peking University’s Liang Jianzhang, who emphasizes that China needs to channel 10% of its GDP to raise its fertility rate from 1.3 to the replacement rate of 2.1.

This scenario presents Xi Jinping with the rationale for the massive direct stimulus and reforms as a preventive measure against an upcoming depression and to set a strong foundation for China’s war against population collapse.

Looks like Xi is going to waste that crisis: Direct consumer cash injections have yet to find favor among the decision-makers. Former Premier Li Keqiang leaned towards tax cuts for companies over direct aid to the public.  This reflects the Party’s inclination to bolster businesses over providing direct monetary support.

The Party’s top echelons historically warn against welfare reliance, championing wealth creation through hard work.

Meanwhile, Xi appears engrossed in political manoeuvres and solidifying Beijing’s regulatory grip on China’s economy, delegating economic remedies that aren’t “overambitious” to local governments, and tossing money into infrastructure projects like his predecessors, Hu Jintao and Jiang Zemin, have are not returning the same results as they once did.

That’s not including the practical issues, like Xi’s apparent undermining of administrative capabilities at both national and provincial levels, ensuring stable local finances, and ensuring that the stimulus could even be distributed.

Short Term Outlook: China’s economic momentum faces headwinds from a deepening property slump. Current data signals a teetering recovery, leading to economists voicing louder support for robust fiscal policies just like Cai’s , especially post PBOC’s surprising rate cut. Zhang Zhiwei of Pinpoint Asset Management Ltd. weighs in, suggesting fiscal interventions as potentially game-changing.

Adding to the mix, state media aired PBOC’s plans to ramp up bond and asset-backed securities sales for consumer and auto finance firms. Buzz indicates about eight of these firms are preparing to market bonds totalling nearly 50 billion yuan.

Long Term Outlook: China is undergoing population collapse, and countries are derisking and decoupling from China at a record pace. Not to mention the countries that can not decouple from China, such as Russia, are undergoing economic breakdown and can not replace the demand for exports. It’s not looking good and it doesn’t seem that Xi will take the opportunity when he can

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