[The Editors' Verdict]What Lies Ahead for China's Economy

China's economy is the hot topic. On the 9th, China's July consumer price index was announced to have fallen by 0.3% year-on-year, marking a negative figure for the first time in 2 years and 5 months, raising concerns about deflation. On the 14th, the media highlighted the default crisis of a major real estate developer, Biguiyuan (Country Garden).

Asia Economy started a special series titled "China's Economy Caught in a Trap" on the 7th, just before these events. The series included key articles such as "Deflation Fear Hits China... Domestic Demand Slump is a 'Fatal Blow'" (7th), "Debt Trap... Real Estate Holding Back Growth" (8th), "Advanced Technology to Decide US-China Hegemony... Who Will Win?" (9th), "Long-term Growth Difficult Without Shift from 'State Advances, Private Retreats'" (10th), and "China on the Test Bench, Korean Economy in Typhoon's Path" (11th), along with several expert interviews and correspondent reports.

Through extensive reporting and multiple interviews, a certain outline of "what will happen to China's economy going forward" could be drawn. China, trapped in the slump of domestic consumption, investment, and the real estate market, is moving away from the past debt-driven high-speed growth model toward a restructuring and low-speed growth model with moderate growth rates.

On the 21st, the People's Bank of China lowered the 1-year Loan Prime Rate (LPR) from 3.55% to 3.45%, a mere 0.1 percentage point cut, and kept the 5-year LPR, which serves as the benchmark for mortgage rates, steady at 4.20%. This suggests prioritizing restructuring over bold economic stimulus like during the global financial crisis.

"China has learned from both Japan and South Korea. From Korea, which experienced a foreign exchange crisis, it learned not to fully open its capital markets. From Japan, it learned about interest rates. China does not lower interest rates significantly?at most by 0.1 percentage point. Despite concerns about economic slowdown, the People's Bank of China effectively kept the benchmark lending rate (LPR) unchanged on July 20. It controls the money supply rather than interest rates. Raising rates increases corporate burdens, while lowering them risks addiction to cheap money. Japan took a long time to deflate its bubble, but China will not be the same." (Interview with Jiman Soo, Senior Research Fellow at the Korea Institute of Finance, on the 8th)

Because China does not open its capital markets and maintains strict control, the possibility of a foreign exchange or financial crisis is minimal. The current problems with real estate developers' insolvency, the previously suspected non-performing loans of financial institutions and shadow banking, appear to be manageable internally. State-owned enterprises hold substantial deposits, and the Chinese government has sufficient fiscal capacity. These are controllable issues within China's domestic financial system.

However, even if China can overcome this crisis, doubts remain about whether it can sustain long-term growth. The Xi Jinping administration has a strong socialist orientation, emphasizing concepts like common prosperity (共同富裕, everyone prospers together) and "state advances, private retreats" (國進民退, state-owned enterprises advance while private enterprises retreat). Before Xi Jinping's leadership, China was a socialist market economy, but since Xi, it appears to be a market economy with socialist characteristics.

"I am not well-versed in political diplomacy, but from an economic perspective, sustainable growth is impossible if private autonomy and creativity are not activated and the economy is led by the government." (Statement by Professor Sung Tae-yoon, Department of Economics, Yonsei University, in an article on the 10th)

If the Chinese government is pragmatic, it will change this policy direction; if not, it will continue to face difficulties while maintaining this stance.

This content was produced with the assistance of AI translation services.