China's Economic Slowdown: We Call for Expanding Social Safety Nets and Structural Reforms to Revive Growth

China's Economic Slowdown: The Path to Sustainable Recovery and Boosting Household Confidence

China's economy is facing significant headwinds as growth in the third quarter of 2024 slowed to 4.6% year-on-year, marking the lowest rate in 18 months. This figure fell short of both the government's full-year growth target of 5% and the 4.7% recorded in the previous quarter, signaling deep-seated challenges within the country’s economy. Factors like sluggish consumption and a deteriorating property market have dampened household confidence, casting doubts over the effectiveness of Beijing’s monetary and fiscal stimulus measures. As China grapples with these economic issues, the focus is increasingly shifting towards the need for comprehensive safety nets to boost consumer confidence and stimulate growth.

Slower Growth Amid Property Slump and Weak Consumption

The 4.6% GDP growth in Q3 2024 is a stark reflection of China’s economic struggles. A key driver of this slowdown is the sharp downturn in the property market, which has eroded household sentiment and led to weak domestic consumption. New home prices in 70 major cities fell by 6.1% in September, surpassing the 5.7% decline seen in August. This steep drop underscores the crisis in the property sector, a vital component of China's economy, and the continued lack of confidence among homebuyers.

Retail sales, however, grew by 3.2% year-on-year in September, surpassing forecasts, while industrial production increased by 5.4%. Despite these gains, economists remain concerned that these metrics are insufficient to offset broader structural weaknesses. The unemployment rate fell to 5.1% in September, down from 5.3% in August, and fixed-asset investment saw modest growth at 3.4% over the first three quarters of the year. Nevertheless, export growth decelerated sharply to 2.4% in September, further complicating the recovery picture.

Beijing's Monetary and Fiscal Stimulus Efforts

In response to the economic slowdown, the Chinese government has announced its largest monetary stimulus package since the pandemic. The People’s Bank of China (PBOC) launched a new facility enabling non-bank financial companies to borrow funds for purchasing equities, with RMB 200 billion already committed out of a total RMB 500 billion available. Additionally, PBOC Governor Pan Gongsheng signaled a potential cut in benchmark interest rates, expected as early as October 20, 2024, to further boost liquidity and stimulate growth.

Beijing is also ramping up fiscal spending to support the economy, with expectations of a major fiscal package to be approved later this month. This package is likely to include measures aimed at stabilizing the housing market, where home sales doubled during the National Day holiday in early October, compared to last year. The government’s plan to redevelop one million homes in urban shantytowns and extend loans to developers could inject $500 billion into the sector.

Despite these policy interventions, many economists remain divided on their effectiveness. Some argue that these steps may not be sufficient to change the trajectory of China’s economy without deeper structural reforms and more direct support for household consumption.

The Need for Structural Reforms and Social Safety Nets

As China navigates this economic turbulence, there are growing calls for more profound and long-lasting reforms to address the root causes of its slowdown. We believe that while short-term stimulus may provide temporary relief, long-term stability will require a multi-faceted approach that includes expanding social safety nets, boosting household confidence, and reducing economic uncertainty. Drawing from successful economic recoveries in other nations, there are several strategies China could consider:

1. Expanding Social Safety Nets: One of the most critical components of restoring consumer confidence is the establishment of robust social safety nets. Historical examples, such as post-war Germany and Japan’s economic recovery, show that universal healthcare, unemployment benefits, and pension systems are key in alleviating public fears. For China, expanding healthcare coverage and unemployment insurance would reduce households’ need to save excessively, encouraging more consumer spending and supporting economic recovery.

2. Education and Childcare Incentives: China faces the challenge of a declining birth rate, partly due to the high cost of raising children. France’s example of offering comprehensive family benefits and free childcare could inspire reforms. Reducing education costs and providing subsidies for childcare could not only ease financial pressures on parents but also encourage higher spending in the economy, benefiting both short-term consumption and long-term workforce participation.

3. Stabilizing the Property Market: China’s property market is a central concern, and its current trajectory echoes Japan’s property bubble collapse in the early 1990s. To avoid a similar prolonged stagnation, China must tackle speculative investment while supporting homeowners and developers. The government’s plan to redevelop urban areas with affordable housing is a positive step, but additional support for homeowners facing potential defaults will be crucial for stabilizing the market.

4. Employment Security and Retraining Programs: With shifts in manufacturing and the rise of automation, employment uncertainty is growing in China. Adopting Sweden’s flexicurity model, which combines flexible labor markets with strong social security, could be a way forward. Offering retraining programs for workers displaced by technology, alongside unemployment benefits, would help mitigate fears of job loss and stimulate consumer confidence.

5. Boosting Domestic Consumption: Direct fiscal measures like cash transfers or consumption vouchers could help jumpstart domestic demand, particularly if targeted at lower- and middle-income households. Similar to the U.S. response during the 2008 financial crisis, these direct payments would increase spending power and stimulate growth. Coupling these measures with tax breaks for small businesses would further enhance the impact on domestic consumption.

6. Support for Small and Medium Enterprises (SMEs): SMEs are the backbone of many economies, including China’s. Drawing lessons from South Korea’s post-crisis recovery, China could offer low-interest loans, tax incentives, and subsidies to help SMEs expand and create jobs. Supporting these enterprises would not only promote economic stability but also encourage more widespread consumer confidence.

7. Long-term Structural Reform: Finally, structural reforms aimed at diversifying China’s economy away from real estate and manufacturing will be crucial. Encouraging innovation, competition, and entrepreneurship could revitalize various industries and reduce reliance on traditional sectors. South Korea’s chaebol reforms, which aimed to reduce monopolistic practices and enhance competition, offer a valuable model for China as it seeks to foster long-term growth.

A Call for Action: Expanding the Social Safety Net to Restore Confidence

While China’s economic challenges are considerable, a significant part of the solution lies in building a stronger social safety net. Expanding healthcare, pensions, and unemployment benefits can alleviate households' fears about the future, enabling them to spend more freely. As China looks to recover from its economic slowdown, these measures, alongside structural reforms and targeted fiscal stimulus, will be essential in boosting consumer confidence and stabilizing the economy for the long term.