“Economic slowdown poses ‘trust trap’ challenge for China”

The Chinese economy is at risk of falling into a confidence trap as the post-coronavirus recovery falters. The latest official data from Bloomberg showed evidence of declining business and consumer confidence, with private companies barely increasing their investment and households restraining spending on commodities such as home appliances. This increases the likelihood of a vicious cycle in which businesses and households curb spending, slowing the pace of the recovery and further eroding confidence. Citigroup economists said China was “on the brink of a trust trap.”

Confidence in the private sector has improved since last year’s coronavirus lockdown, but not yet to the pre-pandemic momentum, according to two independent surveys. While a Yangtze River School of Management survey of relatively successful private companies outperformed Standard Chartered’s SME Index, US consultancy economist Jesse Wheeler said consumer sentiment in China is weakening, and “now seems to be weakening.”

China’s leaders are aware of the problem, with the ruling political bureau last month citing low confidence as an economic challenge. Government officials vowed to boost household income growth by rhetorically boosting support for private companies, especially in the tech sector. However, concrete policy initiatives to boost confidence are small. China’s internet regulator last month launched a campaign against online criticism of the private sector and entrepreneurs as a way to improve the business environment.

Traditional government policies to boost the economy, such as state-led infrastructure investment and bank lending, will be less effective during periods of low confidence. Economists led by Lu Ting, an economist at Nomura Holdings, wrote in a note. “The real barrier to sustaining growth recovery is the lack of confidence.” Adam Wolfe, China economist at Absolute Strategy Research, said a strong rebound in service spending should feed into the labor market, boosting incomes.

Foreign-affiliated companies are also facing additional hurdles. A recent U.S. Chamber of Commerce survey showed growing pessimism about U.S.-China relations amid rising political tensions and high-tech competition. High-profile investigations into foreign companies such as Bain & Co. and Mintz Group have also raised concerns.

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