The worst moment has yet to come.

US Secretary of State Antony Blinken, who was supposed to visit Beijing in February, finally made the trip on June 19 and met with Foreign Minister Qin Gang and President Xi Jinping at the Zhongnanhai compound.

Based on the post-meeting press releases, both China and the US described it as a "frank, in-depth, and constructive" meeting, suggesting a slight easing of bilateral economic and trade tensions. However, the market interpreted it differently.

"Economic Overcooling" is the Greatest Risk

The day after the meeting, the Chinese stock market saw a widespread decline. The People's Bank of China also announced a 10-basis-point reduction in the Loan Prime Rate (LPR).

"Ten basis points is not enough," said Zhang Ming, Deputy Director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, who has been calling for comprehensive interest rate cuts and reserve requirement ratio reductions for the past two years, during an academic conference.

Zhang’s  concerns about the economy are not baseless. China's economic performance in the past two months has been much worse than expected, with consumption, investment, and exports either growing well below expectations or heading towards negative growth.

The situation has raised long-standing worries in academia: Is China's economy heading towards deflation, mirroring Japan's 30 years of decline?

The first to diagnose this was Gao Shanwen, Chief Economist at Essence Securities Co., Ltd., who described the current situation of China, following the pandemic, geopolitics, aggressive property policies, and internet technology, as experiencing a "scarred economy" where people lack confidence and are afraid to consume or invest.

Even Daokui Li, Director of the China Center for Economic Research at Tsinghua University and a member of the National Committee of the Chinese People's Political Consultative Conference (CPPCC), who has typically aligned with the party line, recently deviated, saying "the biggest risk we see now is economic overcooling."

Statistics also reflect the observations and concerns of Gao and Li.

When faced with the global financial crisis in 2008, the People's Bank of China injected 8 trillion yuan into the economy in one year, solving the crisis through "printing money." However, in the current situation, the central bank has already pumped 15 trillion yuan into the market in the first quarter, but the money has not had the desired effect.

Where did the money go? 

Let's start with consumption. During this year's May Day holiday, the average per capita consumption was only 510 yuan, lower than the 603 yuan in 2019.

The macroeconomic indicators for May have further raised concerns about deflation. The Producer Price Index (PPI) has experienced eight consecutive months of negative growth, while the Consumer Price Index (CPI) remains stagnant.

Moreover, the latest data shows that China's fixed-asset investment in a single month amounted to only 4.1 trillion yuan, a 20% decrease compared to the same period last year, when the country was still grappling with lockdowns.

These economic anomalies have become a hot topic in academia. The latest research from Tsinghua University found that in the first half of this year alone, the number of repayments on real estate loans exceeded the number of new loans, indicating that private enterprises are refraining from making new investments and instead focusing on debt repayment.

"In simple terms, the newly added money fails to stimulate investment; the money is just rolling empty," observed a senior financial media commentator in China.

It's not just private enterprises that are struggling to repay debts. Due to the strict crackdown on the real estate sector, local governments, which previously relied on land financing as a fiscal engine, are also facing similar challenges.

The first province to publicly seek help was Guizhou. In recent years, as the largest shareholder of China's stock market leader, Maotai, the provincial government of Guizhou reaped $1 billion in annual fiscal revenue, becoming a model for resolving local debt issues.

However, in April of this year, the Guizhou Provincial People's Government Development Research Center posted an article online acknowledging the difficulties in resolving the massive local debt and seeking "intellectual support" from the central government. Essentially, Guizhou was reaching out to the central government for financial assistance.

Although the post was quickly deleted, the research conducted by Tsinghua University exposed the financial difficulties faced by local governments, and it was not limited to a single province.

The research team from Tsinghua University found that the actual interest rates on some local debts have skyrocketed to double-digit figures. "These are coastal provinces, not provinces like Yunnan or Guizhou. This has severely hindered the development of local governments, and basically 90% of the financing is used to pay interest," revealed a member of the research team.

As local governments struggle to repay debts, they are unable to drive local economic growth, and the first direct impact is on employment opportunities.

According to the latest data from June, China's youth unemployment rate has been continuously riding for two consecutive months.

"We can't think of any new ways to help students find jobs," a humanities professor at a university in Sichuan anxiously said.

Even the job market for graduates has seen a downgrading trend, and even BYD, China's largest electric vehicle manufacturer, has experienced it. BYD founder Wang Chuanfu recently said at a press conference, "In the past, we wanted to recruit students from Tsinghua University and Peking University, but they didn't show much interest. This year, we've recruited quite a few," he said. Among the 30,000 engineering graduates it hired this year, at least 700 to 800 are from Tsinghua University and Peking University.

If the emergency policies go wrong, they may lead to zombification. 

And the youth employment problem, at present, may not be the worst.

Seeing the poor economic figures in the first half of the year, major investment banks such as Standard Chartered, UBS, and Nomura have all revised down China's full-year GDP growth rate by 0.4 or 0.5 percentage points. If we look at China's official formula, where each percentage point of GDP growth creates 2 million job opportunities, a bleak growth outlook coupled with the risk of deflation also means that the youth unemployment rate could continue to rise.

Even Yin Yanlin, former Deputy Director of the Central Finance and Economics Leading Group Office and Deputy Minister of Finance, couldn't help but speak out recently, saying, "From April to May until now, there have been significant deviations from expectations in the economy, to the point where some people believe that the initial forecast may have been too optimistic."

CommonWealth previously interviewed renowned Chinese economist Yu Yongding, who predicted that starting from 2015, China's low economic growth could continue for about 7-8 years, precisely falling on this year.

"If the Chinese government's response measures go wrong, it is very likely that China will 'Japanify' or become 'zombified'," Yu concluded at the time.

What measures China will take to restore confidence and rescue the economy is still uncertain. But any response at this point may be the key to whether China will fall into 30 years of decline like Japan has.

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Uploaded by Ian Huang