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China Urged to Take Swift Action to Revive Struggling Economy, According to Cornell Professor

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China's Economy Requires Decisive Policy Action, Says Economic Professor

Policymakers Must Take Action

China's authorities need to take decisive policy action to pull its "sputtering" economy back from the brink, according to Eswar Prasad, an economics professor at Cornell University. Beijing doesn't want to send a signal that it is in "panicky mode yet," he added, as policymakers want to show confidence that they can manage the economic situation. "But the grim reality at this stage is that it is going to take a fairly broad and decisive policy package with both short-term and long-term measures to pull the economy back from the brink," Prasad told CNBC's "Street Signs Asia" on Tuesday.

Chinese Economy Struggles

Last week, China hinted at moves to "adjust and optimize" policy measures in what the leadership acknowledged as a "torturous" economic recovery. "It certainly looks like the Chinese economy is sputtering after rolling back to life," following the easing of Covid restrictions, said Prasad, a former head of the International Monetary Fund's China division. "Practically every indicator we've seen in the last few weeks has been quite softish," he added.

Slower Growth Than Expected

Recent economic data further point to slower growth than expected as China's leaders show little inclination to embark on large-scale stimulus. On Monday, official data showed China's factory activity contracted for a fourth consecutive month in July, while non-manufacturing activity slowed to its weakest this year as the world's second-largest economy struggles in the wake of soft global demand. In July, second-quarter GDP rose by 6.3% from a year ago, largely missing the 7.3% growth that analysts polled by Reuters had predicted. The unemployment rate among young people between the ages of 16 to 24 was 21.3% in June, a fresh record.

Concerns About Deflation

"The prospect of deflation, both in producer prices and possibly even in consumer prices, is raising real concerns — not just about where the economy is going, but whether policy tools are going to have traction to reverse this loss of momentum," said Prasad. Other economists have also warned that signs of deflation are becoming more prevalent across China. But the People's Bank of China has pushed back on the deflation issue. China's producer prices fell 5.4% in June from a year earlier and slipped 0.8% from a month ago, according to official data. The annual decline in June was China's ninth consecutive drop and its steepest since December 2015. Annual consumer price inflation was flat in June — driven by a 7.2% drop in pork prices — missing Reuters' expectations for a 0.2% rise and weaker than the 0.2% rise in May.

Impact on Employment and Future Growth

As China's economy continues to slow, it means that employment growth "is going to be hurt even more," which raises "some social stability concerns," said Prasad. "It also means that you're going to have less investment, which is going to affect productivity growth in the future," he added. "That means that future growth prospects are also going to be quite significantly dampened."

Implications for New Businesses in China

Challenging Economic Environment

The current economic struggles in China, as discussed by economics professor Eswar Prasad, present a challenging environment for new businesses looking to establish themselves in the market. China's sputtering economy, slower growth than expected, and concerns about deflation all indicate a turbulent economic landscape.

The Need for Decisive Policy Action

Prasad emphasizes the importance of policymakers taking decisive action to address the country's economic issues. However, the cautious approach taken by Beijing suggests a reluctance to signal panic and a desire to maintain confidence in their ability to manage the situation.

Impact on Business Operations

For new businesses, these economic challenges can have significant implications. Slower growth means reduced consumer spending and demand, which can make it harder for new companies to attract customers and generate revenue. Additionally, employment growth being hurt and decreased investment can limit the resources available for startups, making it more challenging to establish and expand operations.

Long-Term Growth Prospects

The dampened future growth prospects highlighted by Prasad further underscore the need for new businesses to carefully navigate the Chinese market. With productivity growth likely to be impacted, entrepreneurs must adopt innovative strategies to maximize efficiency and competitiveness.

Adaptability and Resilience

In this challenging economic climate, new businesses in China must prioritize adaptability and resilience. They should closely monitor policy developments and market trends, leveraging opportunities that may arise from any decisive policy measures implemented by the authorities.

Seeking Opportunities Amidst Challenges

While the economic situation in China may present hurdles, it also offers opportunities for innovative and forward-thinking entrepreneurs. By focusing on emerging sectors, such as technology and green industries, and leveraging the evolving consumer preferences, new businesses can position themselves for success in spite of the difficulties.

In summary, the uncertain economic environment in China calls for new businesses to be agile, strategic, and resourceful in navigating the market. By staying informed, adapting to the changing landscape, and capitalizing on emerging opportunities, entrepreneurial ventures can thrive amidst the challenges presented by China's economic struggles.

Article First Published at: https://www.cnbc.com/2023/08/01/china-should-act-to-pull-sputtering-economy-back-from-brink-professor-.html

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