Beijing needs to junk its economic playbook

Kagi Summary:

China has recently experienced one of its worst economic performances in nearly half a century, with GDP growth falling short of the 5.5 percent target for 2022. Despite record-breaking exports of $3.59 trillion and 7 percent export growth, the government has had to move beyond the familiar playbook of boosting exports and government investment stimulus to jump-start the economy. Chinese households have experienced the worst slowdown in consumption growth in a generation, with income growth stagnating and consumer confidence plummeting to a record low. The usual government solution of major stimulus packages has exacerbated local government indebtedness and shrunk fiscal space. In response, Chinese leaders have shifted to prioritize private consumption for economic recovery, but they face two primary challenges: financial repression and household balance sheet deterioration. With household debt rising faster than income growth, the real test for Chinese policymakers is how to incentivize and persuade disheartened Chinese families to contribute to economic growth by expanding household consumption.