China’s economy suffers many problems, and some are beginning to look like those that made it so hard for America to break out of its Great Depression in the 1930s. True, China has not experienced a stock market crash. That is different. What China does have in common with that historic America is the loss of confidence in the economy’s structures and in its future. For America, the crash destroyed confidence. For China the problem lies in the policies of now President-for-life Xi Jinping. Prospects are far from promising.

One key sign of this undesirable condition is the drop in bank lending. Always an indicator of business and consumer spending plans, Chinese demands for bank credit in December were, according to the People’s Bank for China (PBOC), 16% below year-ago levels and almost 20% below consensus expectations. This picture is all the more remarkable because Beijing has engaged in considerable stimulus spending on infrastructure, and the PBOC has reduced interest rates during the past year and lavishly provided markets and financial institutions with liquidity, increasing the broad money supply some 9.7%.

The most likely explanation why Chinese people and businesses have failed to take advantage of the infrastructure spending and this easy credit is that they see little prospect for gain. They have lost any sense that things will improve, at least that they will improve enough make the risk of going into debt worthwhile. According to Beijing’s National Bureau of Statistics, the nation’s consumer confidence index has fallen almost 10 percent from its high of last March and stands at a lower level than ever, even during the pandemic and the needless lockdowns and quarantines that followed it under Beijing’s zero-Covid policies. Business confidence has picked up slightly from late 2023 but remains depressed by just about any historic standard even going back to the early part of this century when data collection began.

This lack of confidence — this wariness of borrowing and spending – is what so resembles the problems the United States faced in the Great Depression. The great economist John Maynard Keynes explained the nature of the problem at the time. He noted how stimulus from Washington or a flood of money from the Federal Reserve can only get the economy moving if consumers and businesses have enough faith in the future to follow it. If their lack of confidence impels them to refuse, the stimulus will quickly run its course and the economy, after perhaps a brief improvement, will fall back into slow growth or decline. The same is true of monetary stimulus. No matter how much liquidity the central bank provides, a lack of confidence will prevent businesses and consumers from using it. He called it the “liquidity trap.”

Most of the blame for China’s problem comes not from a stock crash but rather from the policies of President Xi Jinping. He has made four crucial contributions to this mess. His first was his decision in 2019-20 to suddenly withdraw Beijing’s long-provided support for residential property development. That decision caused a collapse in this once-important sector in China’s economy and also a drop in property values with devastating effects on household wealth. His second mistake was to offer an at best tepid response to the unfolding economic troubles. From the first failures in 2021 until only a few months ago, Beijing pretended that matters, contrary to reality, required nothing of the authorities, which should instead have provided support for financial markets. Because of this lack of support, the problems of the property sector and household wealth metastasized throughout China’s financial system, further hurting the economy and eroding confidence.

Zero-Covid counts as Xi’s third contribution to China’s woes. That policy kept the Chinese economy under lockdowns and quarantines for at least 18 months longer than the rest of the world. His goal was the impossible one of eradicating the virus. And in pursuit of that dream, he held back China’s economy and created the sense among people that they could no longer count on a regular income and among businesses that there was little sense in expansion. If that were not enough, Xi also engaged during this time in rhetoric castigating private Chinese business, insisting that managers and owners give up the pursuit of profits to follow the Communist Party’s agenda. More than all else, this sort of talk made Chinese business owners wary of the future and unwilling to invest in hiring or expansion.

Despite these similarities to the root cause of the Depression in 1930s America, it would be too bold to forecast a Great Depression for China. It is not however too bold to forecast that circumstances will hold back China’s economic prospects for some time to come, especially if Xi and his colleagues in the Forbidden City fail to wake up to the need to change policy so that individual Chinese and business can recover confidence. Such a change may be a forlorn hope, but it is needed anyway.

Written by: Milton Ezrati @Forbes

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