Pessimistic China vs optimistic India: confidence seen key to economic puzzle (2024)

With pessimism in China and optimism in India, confidence seen key to economic puzzle

A lack of confidence and low expectations for China’s economic growth remain major hindrances holding back consumers and investors, economists and veteran policy observers warned ahead of next week’s agenda-setting third plenum.

Pessimism from economists and observers inside China about outlook of the world’s second-largest economy could send a chilling message to overseas observers, according to Helen Qiao, chief Greater China economist at Bank of America Merrill Lynch.

“In China, no matter how much we tell investors that China has no problems, that China will surely ramp up the implementation of future policies, the overall feedback we got from investors was pessimistic, and they treat good news as if it won’t happen, and bad news as if it will get worse,” Qiao told a Tsinghua University forum about China’s midyear economic update on Saturday.

Qiao, who is also the bank’s head of Asia economics research, added that the atmosphere among investors in India was completely different, with economic growth and momentum being hyped up.

Compared to the stumble of China’s A-shares after the benchmark Shanghai composite index fell by 0.25 per cent in the first half of the year, India’s major benchmark index – the BSE Sensex which tracks the performance of the 30 biggest and most traded stocks on the Bombay Stock Exchange – hit a record high after rising by 9.4 per cent during the same period.

Sometimes [the market atmosphere] is driven by emotions, especially now when investors are easily swayed by the market

The market capitalisation of the Indian stock market has surpassed Hong Kong to become the fourth largest in the world.

“Sometimes [the market atmosphere] is driven by emotions, especially now when investors are easily swayed by the market,” Qiao added.

“What we should be doing is setting rules, and ensuring policy stability, the rule of law, and promoting a more law-based governance approach in the medium to long term.”

The Tsinghua University forum was held at a key juncture for China, as it is grappling to get its economic expansion back on track in the second half of the year.

The third plenum of the new Central Committee, which is expected to chart China’s growth path for the next decade, is also set to take place next week.

Pessimistic China vs optimistic India: confidence seen key to economic puzzle (1)

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What does it mean for the world when Chinese consumers tighten their belts?

What does it mean for the world when Chinese consumers tighten their belts?

Consumption is seen as being among the weakest links in China’s economic recovery as a result of a lack of confidence.

In the first five months of 2024, retail sales grew by 4.1 per cent compared to the last year, lower than the 4.3 per cent average annual growth in the first two years of the coronavirus in 2020 and 2021.

“The demand for consumption is extremely suppressed,” said Wu Shuyu, a researcher at the Academic Centre for Chinese Economic Practice and Thinking, a think tank at Tsinghua University, told the forum.

The sluggish recovery in spending is seen to be primarily due to a slowdown in residents’ income growth.

Since 2021, for the most part, the growth rate of consumer spending has outpaced the growth rate of per capita disposable income, official data showed, while the income growth of the middle- and low-income groups has also slowed, while young people also face employment pressures and concerns about pay cuts.

That indicates a weak willingness to leverage and people are more inclined to increase precautionary savings rather than spend

In the first five months of the year, new household loans increased by 889.1 billion yuan (US$122.3 billion), but bank deposits by households rose by 7.13 trillion yuan during the same period, central bank data showed.

“That indicates a weak willingness to leverage and people are more inclined to increase precautionary savings rather than spend,” Wu said.

And according to a report by the Academic Centre for Chinese Economic Practice and Thinking on China’s economic outlook for the second half of the year, from a policy aspect, local governments should be allowed to retain more fiscal revenues derived from value-added tax and consumption tax, which are now production-based taxes on the manufacturing locations, rather than consumption-based taxes on the consumptions locations.

“This will encourage local governments to focus on human-centred development, increase residents’ income, improve basic public services, eliminate concerns about consumption, and boost consumer spending,” said the report, which was also released on Saturday.

Pessimistic China vs optimistic India: confidence seen key to economic puzzle (2)

Pessimistic China vs optimistic India: confidence seen key to economic puzzle (2024)
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