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Why the Chinese government may struggle to revive the economy

China’s post-covid The recovery was supposed to be a world shock. Instead, it just looks shaky. Economic data missed expectations in April after an initial release of pent-up demand. In response, Chinese stocks fell, government bond yields fell and the currency weakened. The country’s trade-weighted exchange rate is as weak now as it was in November, when officials were locking down cities.

Will the data for May look better? On the last day of the month, the National Bureau of Statistics released its Purchasing Managers Index (production indexSecond). They showed services sector output grew more slowly than in April and manufacturing activity contracted for a second straight month. Another manufacturing index by business publication Caixin is more encouraging, possibly because it has less weight for inland heavy industries, which are likely to benefit less from a consumption-led recovery.

two groups production indexIt also shows that the prices that manufacturers pay for inputs and charge for outputs have fallen. Some economists now think producer prices — the prices charged “before they leave the factory” — may have fallen by more than 4% in May compared with a year ago. Such price cuts are hurting industrial profits, which in turn discourages investment in manufacturing. That has sparked fears of a deflationary spiral.

Therefore, Lu Ting of Nomura Bank said that the Chinese economy is facing an increasing risk of a “double dip”.Growth from one quarter to the next can drop to close to zero, even overall growth, which is not the same as gross domestic product Still respectable compared to a year ago.

Elsewhere in the world, weak growth has been accompanied by troubling inflation. That makes it harder for policymakers to know what to do. But the problems of stagnant growth and falling inflation in China point in the same direction: easier monetary policy and an easier fiscal stance.

Some investors worry that Beijing’s concerns aren’t enough. Central banks don’t seem to care about deflation. Even without much stimulus, the government is likely to hit its modest growth target of 5% this year, simply because the economy was so weak last year.

That stance could soon change, predicts Robin Xing of bank Morgan Stanley.He noted that in 2015 and 2019, policymakers reacted quickly when manufacturing problems arose production index It has fallen below 50 for several months in a row. He believes the PBoC will cut bank reserve requirement ratios in July, if not earlier. He also believes that China’s policy banks, which lend in support of development goals, will increase credit for infrastructure investment. That should be enough to make the slowdown a “small problem.”

Others are less optimistic. Mr Lu believes that the government will take action, but small adjustments will not clear the gloom for long. A larger response faces other obstacles. Officials could lower interest rates, but that would squeeze the profitability of banks, which must already be worried about losses on property loans. They could transfer more money to local governments, but many have wasted money on poorly conceived infrastructure in the past. They could hand out cash directly to households, but creating the equipment to do so will take time. In the past, the government could quickly stimulate the economy through investment in real estate and infrastructure. Since then, Mr Lu noted, its “toolbox has gotten smaller and smaller”.

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