China's economic landscape is at a pivotal juncture, marked by a notable slowdown in various key indicators. The latest data paints a concerning picture, with August exports plummeting by 8.8 percent in dollar terms and imports falling by 7.3 percent. These alarming figures have raised questions about the potential need for further stimulus measures by the Chinese government and the People's Bank of China (PBOC).

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Morgan Stanley, a global financial institution renowned for its economic analysis, has shed light on some of the underlying issues plaguing China's economic stability. Chetan Ahya, Chief Asia Economist at Morgan Stanley, during an interview with CNBC-TV18, pinpointed the key factors contributing to China's economic challenges.

One of the most pressing issues identified by Morgan Stanley is the overleveraged nature of local governments in China. Over the years, these local entities have accumulated substantial debt, creating a precarious situation that poses a significant threat to economic stability. Simultaneously, the property sector, which has been a cornerstone of China's economic growth, is showing signs of distress.

Ahya emphasised that fiscal policy holds the key to China's recovery.

“We think that the key to China’s recovery now is fiscal policy and at this point of time they are still holding back on fiscal easing,” he said.

While China has tightened its fiscal policy by 5.5 percent up to this point, there may be room for maneuvering. Carefully calibrated fiscal measures could help stimulate economic activity and counter the effects of the ongoing slowdown.

In addition to fiscal policy, China must confront several other economic challenges. These include mounting debt levels, shifting demographics, and disinflationary pressures. A comprehensive approach is required to tackle these issues effectively.

To revive its economy, China needs to consider a more expansive fiscal policy that injects funds into key sectors and projects. This approach could stimulate aggregate demand, fostering economic growth and stability. By addressing these challenges head-on, China can aim for a more balanced and resilient economy.

China's economic model has long been export and investment-driven. However, the current global economic climate necessitates a shift towards consumption-led growth. Encouraging domestic consumption could provide a buffer against external shocks and contribute to sustainable economic development.

For more details, watch the accompanying

video.

Also Read:Economists cut China's growth outlook further for 2023

First Published:Sept 7, 2023 5:50 PM IST