Tighten your belts and fight for AI! China's economic woes worsen, government only implements patch-up measures

The Wall Street Journal reported that despite China’s astonishing technological progress from artificial intelligence (AI) to space, most economic sectors are still in a sluggish state. The housing market has not yet bottomed out, and the huge number of college graduates have difficulty finding jobs, and companies still struggle to make profits. However, the Chinese government has not launched bazooka-style policies and has only adopted patching measures, reflecting the intractability of China's current economic predicament.

According to reports, in the past month, the Chinese government has launched a series of measures to boost the economy, including mortgage subsidies, capital injections into state-owned banks, and new infrastructure investments. However, Frederic Neumann, chief economist for Asia at HSBC, bluntly said, "This is not a rocket launcher, and the boosting effect will be limited."

China's epic housing market crash has entered its sixth year. Starting this month, the Chinese government began to subsidize mortgage interest for first-time home buyers. However, this 1% interest subsidy is only for one year, and there are many eligibility criteria. Morgan Stanley estimates that the subsidy will cover only 16% of the country’s housing transaction volume and 12% of new home sales.

Also last week, officials used policy tools to expand infrastructure investment. However, Barclays analysts believe that the relevant scale is much smaller than the stimulus package launched in September 2024, and in fact "will not help change the overall situation."

Prior to this, the Chinese government injected US$54 billion into eight large state-owned banks and insurance companies in September. Due to instructions from the central government to provide loans to distressed industries such as real estate and local government financing platforms, these financial institutions are facing increasingly serious financial pressure.

Nicholas Borst, head of China research at Seafarer Capital Partners, pointed out that the scale of the capital injection is too small to solve the problem. The Chinese government did not decisively confirm a large number of non-performing loans and deal with the corresponding financial consequences. Instead, it adopted a procrastination strategy.

Despite a sluggish economy, Chinese President Xi Jinping has pushed for China to become a global leader in cutting-edge technology, reflecting his strategic focus on enabling China to withstand Western pressure and sending a message to the Chinese people that economic hardship is sometimes necessary to achieve larger national goals.

Victor Shih, a China economics expert at the University of California, San Diego, said Xi Jinping’s emphasis on pursuing industrial dominance has caused the issue of a weak domestic economy to take a back seat.

However, there is a risk that the patch-up measures introduced to deal with the weak economy will continue to worsen the deflationary cycle and the labor market difficulties, further dragging down economic growth.