When China suddenly dismantled its lockdowns and other Covid precautions last December, officials in Beijing and many investors expected the economy to spring back to life.
It has not worked out that way.
Investment in China has stagnated this spring after a flurry of activity in late winter. Exports are shrinking. Fewer and fewer new housing projects are being started. Prices are falling. More than one in five young people is unemployed.
China has tried many fixes over the last few years when its economy had flagged, like heavy borrowing to pay for roads and rail lines. And it spent huge sums on testing and quarantines during the pandemic. Extra stimulus spending now with borrowed money would spur a burst of activity but pose a difficult choice for policymakers already worried about the accumulated debt.
“Authorities risk being behind the curve in stimulating the economy, but there’s no quick fix,” said Louise Loo, an economist specializing in China in the Singapore office of Oxford Economics.
China needs to right its economy after closing itself off to the world for almost three years to battle Covid, a decision that prompted many companies to begin shifting their supply chains elsewhere. Xi Jinping, China’s leader, met on Monday with the secretary of state of the United States, Antony J. Blinken, in an attempt by the two nations to lower diplomatic tensions and clear the way for high-level economic talks in the weeks ahead. Such discussions could slow the recent proliferation of sanctions and counter measures.
China’s halting economic recovery has seen only a few categories of spending grow robustly, like travel and restaurant meals. And those have increased in comparison with extremely low levels in spring 2022, when a two-month lockdown in Shanghai disrupted economic activity across large areas of central China.
The economy has been particularly weak in recent weeks.
“From April to May to now, the economy has experienced significant unexpected changes, to the point where some people believe that the initial judgments may have been overly optimistic,” Yin Yanlin, a former deputy director of the Chinese Communist Party’s top economic policymaking commission, said in a speech at an academic conference on Saturday.
Chinese government officials have been dropping hints that an economic stimulus plan may be imminent.
“In response to the changes in the economic situation, more forceful measures must be taken to enhance the momentum of development, optimize the economic structure, and promote the continuous recovery of the economy,” the country’s State Council, or cabinet, said after a meeting on Friday led by Li Qiang, the country’s new premier.
China’s economic weakness holds benefits and dangers for the global economy. Consumer and producer prices have fallen for the past four months in China, putting a brake on inflation in the West by pushing down the cost of imports from China.
But weak demand in China may exacerbate a global slowdown. Europe already dipped into a mild recession early this year. Rapid interest rate increases in the United States have prompted some investors to bet on a recession late this year there as well.
Beijing has already taken some steps to revitalize economic growth. Tax breaks are being introduced for small businesses. Interest rates on bank deposits have been reduced to encourage households to spend more of their money instead of saving it. The latest government measure is expected on Tuesday, when the state-controlled banking system is likely to reduce slightly its benchmark interest rates for corporate loans and home mortgages.
But many economists, inside and outside China, worry about the effectiveness of the new measures.
Consumers are hoarding cash and investors are wary of putting money into China’s companies. Private investment has actually declined so far this year compared with 2022. Housing remains in crisis, with developers borrowing more to pay existing debts and to complete existing projects, even as China already suffers from an oversupply of homes.
China’s housing market stands at the heart of its troubles. Construction has accounted for as much as a quarter of China’s economic output. But would-be homeowners have been put off as developers have defaulted on their debts and failed to finish apartments buyers had paid for in advance.
Housing construction has fallen nearly 23 percent in the first five months of the year, compared with the same months last year. That suggests the real estate sector has further to fall in the coming months.
Chen Leiqian, a 27-year-old marketer in Beijing, started looking for an apartment with her boyfriend in 2021 after five years of dating. But they then decided to stay put in a rental apartment when they married.
“Housing prices across the country are falling, and the economy is very bad — there are just too many unstable elements,” Ms. Chen said.
Two-thirds of Ms. Chen’s co-workers in her department at an online tutoring company were laid off after China cracked down on the for-profit, private education industry in 2021. She also had a friend who could no longer pay a mortgage after losing a job in the tech sector, and lost the home in foreclosure.
The caution of middle-class families like Ms. Chen’s may pose the biggest dilemma for policymakers as they search for an effective formula for another round of economic stimulus.
“You can throw money on people but if they are not confident, they will not spend,” said Alicia Garcia-Herrero, the chief economist for Asia-Pacific at Natixis, a French bank.
Households are not alone in struggling to pay their debts — so are local governments, which has limited their ability to step up infrastructure spending.
The government is wary of starting another credit binge of the sort seen in 2009, during the global financial collapse, and in 2016, after China’s stock market plunged the preceding year.
Although the sagging real estate sector has hurt demand inside China, exports have been flat this year and actually declined in May. The weakness of China’s normally powerful exports is particularly noteworthy because Beijing has allowed its currency, the renminbi, to lose about 7 percent of its value against the dollar since mid-January. A weaker renminbi makes Chinese exports more competitive in foreign markets.
More exports help create jobs and could compensate for the otherwise slack domestic economy. But it’s not clear how much China will be able to count on exports to help as some of China’s biggest trading partners have moved some purchases to other countries in Asia.
In the United States, the Trump administration imposed tariffs on a wide range of Chinese industrial goods, making it more expensive for American companies to buy from China. Then President Biden persuaded Congress last year to authorize broad subsidies for American production in categories like electric cars and solar panels. China’s exports to the United States were down 18.2 percent last month compared with May last year.
Now as China considers how to reinforce the economy, it must contend with a loss of confidence among consumers.
Charles Wang runs a small travel company with eight employees in Zhangjiakou, in northern China. His business has almost fully rebounded after the pandemic but he has no plans to invest in expansion.
“Our economy is actually going down, and everyone doesn’t have so much time and willingness to spend,” Mr. Wang said. “It’s because people just don’t want to spend money — everyone is afraid again, even the rich.”
Li You contributed research.