China is concerned about a 'debt-deflation spiral'

China's economy is currently facing several challenges, including a housing recession, a stock market downturn, and deflation. These headwinds have led to concerns among analysts and economists about the future of China's economy. However, the Institute of International Finance (IIF) remains optimistic, stating that Beijing still has the capacity to provide stimulus in 2024.

One of the main concerns is deflation, which has been caused by a lopsided supply and demand dynamics in China. Housing supply and manufacturing capacity have exceeded domestic needs, leading to negative consumer price and growth gauges in the fourth quarter of 2023. This has resulted in high real interest rates and tightened credit conditions.

The real estate market in China has also been severely affected, with home sales and housing starts declining significantly since 2021. However, the IIF expects policymakers to take steps to stem these declines in 2024, which would lessen the drag on economic growth. They also anticipate that a stabilization of the housing market and the healing of the Covid-related scars will boost household consumption.

Despite the challenges, the IIF maintains a growth forecast of 5% for China this year, above the consensus estimate of 4.6%. They believe that an adequate policy response from Beijing can support this growth. However, they also acknowledge the risks involved, especially given Beijing's history of policy errors. If policymakers fail to act, deflation expectations could become entrenched, further impacting domestic demand and foreign investment.

Overall, the current state of China's economy presents a mixed picture. While there are concerns about the housing recession, stock market downturn, and deflation, the IIF remains optimistic about the potential for growth. The key factor will be the policy response from Beijing, as adequate support is necessary to prevent a debt-deflation spiral.


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