"Why China is reluctant to launch a massive economic bailout"

From the South China Morning Post, August 29:

•  Beijing’s move away from aggressive macroeconomic policy goes back to ‘de-risking’ efforts that began in 2016
•  However, the growing risk of a protracted downturn underscores the need to find more effective solutions to the pressing economic challenges

China’s aggregate demand has weakened significantly over the past three years. In addition to the enduring effects of China’s anti-Covid policy, the country has also been weighed down by the decrease in global demand. Exports fell by 14.5 per cent year on year in July.

Given such downturn pressures, the government’s decision not to announce a massive stimulus package, as many had anticipated, has left foreign and Chinese observers deeply perplexed.

While China’s leaders are certainly aware of the ongoing economic slowdown, they may be estimating that the risk of a bailout is worse than the risk of inaction. Or perhaps they have more confidence in the domestic economy’s resilience against a global recession and believe that it will recover quickly on its own.

Regardless, China seems to have chosen not to take further action. In fact, it currently faces significant roadblocks to any additional economic intervention. After all, the accumulation of massive debt, particularly among local governments, has left China with limited room for manoeuvre.

Moreover, the external environment has become increasingly unfavourable since at least 2018, presenting challenges unlike any it has faced over the past 40 years

Consequently, China has adopted an increasingly cautious approach to macroeconomic management. Monetary policy is an interesting case in point.

At the onset of the Covid-19 pandemic in March 2020, for example, the US Federal Reserve immediately cut interest rates to near zero. By contrast, the People’s Bank of China lowered interest rates by only 0.2 percentage points.

 

Similarly, while the Fed has raised interest rates rapidly in response to surging inflation, hiking them by five percentage points since March last year, the PBOC has pursued a series of modest rate cuts to accommodate gross domestic product growth and reduced demand.

This approach is also the main reason China has avoided runaway inflation over the past two years. This was made clear in an April speech by former PBOC governor Yi Gang during his visit to the Peterson Institute for International Economics in Washington.

 

During his speech, Yi highlighted the PBOC’s adherence to the “attenuation principle”, which suggests that central bankers should refrain from taking drastic action under uncertain circumstances. While this well-known concept was first introduced by Yale economist William Brainard in 1967, Yi’s speech offered valuable insights into the shift in China’s economic-policy thinking in recent years....

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