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Macroscope | Why China is reluctant to launch a massive economic bailout
- Beijing’s move away from aggressive macroeconomic policy goes back to ‘de-risking’ efforts that began in 2016
- However, the growing risk of a protracted downturn underscores the need to find more effective solutions to the pressing economic challenges
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China’s aggregate demand has weakened significantly over the past three years. In addition to the enduring effects of China’s anti-Covid policy, the country has also been weighed down by the decrease in global demand. Exports fell by 14.5 per cent year on year in July.
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Given such downturn pressures, the government’s decision not to announce a massive stimulus package, as many had anticipated, has left foreign and Chinese observers deeply perplexed.
While China’s leaders are certainly aware of the ongoing economic slowdown, they may be estimating that the risk of a bailout is worse than the risk of inaction. Or perhaps they have more confidence in the domestic economy’s resilience against a global recession and believe that it will recover quickly on its own.
Regardless, China seems to have chosen not to take further action. In fact, it currently faces significant roadblocks to any additional economic intervention. After all, the accumulation of massive debt, particularly among local governments, has left China with limited room for manoeuvre.
Moreover, the external environment has become increasingly unfavourable since at least 2018, presenting challenges unlike any it has faced over the past 40 years
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Consequently, China has adopted an increasingly cautious approach to macroeconomic management. Monetary policy is an interesting case in point.
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