This article is authored by Ananya Raj Kakoti and Gunwant Singh, scholars of international relations, Jawaharlal Nehru University.
China’s economic landscape is currently undergoing a profound transformation, marked by a series of challenges that have far-reaching implications for both the nation and the global economy. Notably, China has entered a rare phase of deflation, characterised by a 0.3% decline in consumer prices, a phenomenon that stands in stark contrast to the prevailing global trend of rising costs. This deflationary environment threatens to curtail consumer spending and disrupt production, potentially leading to layoffs and reduced wages.
While China witnessed a rapid economic resurgence earlier in the year after lifting strict Covid-19 lockdowns, this momentum has since stalled. A complex interplay of factors, including falling consumer prices, a deepening real estate crisis, and declining exports, has contributed to a challenging economic landscape. Of particular concern is the alarming rate of youth unemployment, where one in five young individuals is without a job. This issue has reached such a magnitude that the government has ceased publishing related data, underscoring the severity of the problem.
Despite the relaxation of stringent Covid-19 restrictions, China’s efforts to kickstart economic recovery have yielded lacklustre results. The country’s unique approach to combating the pandemic, characterised by recurrent lockdowns and widespread testing under the zero-Covid policy, disrupted economic activities and fostered an environment of uncertainty. Even after restrictions were lifted, consumer caution persisted, compounded by diminished international demand due to global geopolitical tensions and uncertainty.
In response, the Chinese government has embarked on a multifaceted strategy to stabilise the economy and restore confidence. Noteworthy measures include emergency rate cuts to infuse liquidity into the system and encourage borrowing. To reignite demand and stimulate economic activity, the government has shifted its stance on housing speculation, a move that was once discouraged but is now subtly encouraged due to its potential to boost a sector contributing nearly 30% to China’s Gross Domestic Product (GDP).
Signs of financial distress have manifested in various forms, with the Hang Seng Index in Hong Kong plunging into a bear market and the Chinese yuan hitting its lowest point in 16 years. Experts speculate that China might be experiencing a balance-sheet recession, where debt repayment takes precedence over spending even in a low-interest rate environment. Deflation, with its potential to discourage immediate purchases in anticipation of lower prices, poses the risk of triggering a downward economic spiral.
Amidst complexities, recent economic indicators highlight challenges. China’s GDP growth was only 3% in 2022, falling short of the 5.5% target. The decline continued in Q1 2023 to 2.2%, plunging further to 0.8% in Q2. Tencent and Alibaba’s revenue increased by 11% and 14% YoY, respectively, but below expectations. These challenges were evident across sectors with a 14.5% drop in July exports and a 0.3% decline in consumer prices, raising concerns about deflation.
China’s vital real estate sector is undergoing turmoil. A major developer, Country Garden, missed coupon payments, causing a 60% YoY drop in July sales and a 78% decline from 2021. The debt-to-GDP ratio remains at around 300%, while local government debt has surged, straining cash flow. Challenges are compounded by 20% youth unemployment, tech sector regulations, and strained foreign relations, leading to reduced income, consumption, and foreign investor confidence.
Despite implementing stimulus measures, fractures in China’s economic model have emerged. The path to recovery remains uncertain. Household consumption growth declined from 6.7% to 4% during Xi Jinping’s second term. The persistent debt-to-GDP ratio of around 300% presents significant fiscal challenges.
Anchored heavily on the property sector, which constitutes a substantial portion of its GDP, China faces inherent challenges arising from property-driven growth and oversupply concerns. To address these issues, China must consider transitioning to an economic model fuelled by consumer spending rather than state-led investment. However, these reforms are not without their obstacles, as they entail significant political and structural changes.
China’s demographic landscape poses additional challenges. The long-standing one-child policy and the nation’s reluctance to expand its population have led to an ageing society. This shift could potentially hinder economic growth and disrupt consumption patterns, as a shrinking labour force grapples with increased healthcare costs and strains on the fiscal system.
China’s current economic challenges draw comparisons to Japan’s 1990s struggles, marked by deflation, stagnant growth, asset bubbles, and structural issues. Japan’s extended economic difficulties serve as a cautionary tale, highlighting potential pitfalls for China. However, China’s economy is still growing, albeit slower. The relatively higher interest rates compared to Japan’s 1990s situation provide room for necessary monetary adjustments. While a massive stimulus like the one during the global financial crisis is unlikely, Beijing may introduce measured economic support.
China’s economic slowdown is challenging the International Monetary Fund’s (IMF) projection that the nation would contribute 35 per cent to global growth. This deceleration is casting its shadow on commodities, construction, and global companies operating within China. China’s emphasis on state-led economic advancement aligns with its governmental priorities, but the opacity and control over private enterprises have raised concerns about a lack of transparency.
Drawing historical parallels, similarly, the European Debt Crisis and the Latin American Debt Crisis share certain debt-related challenges with China, yet China’s global significance sets it apart. While the Great Depression and the Global Financial Crisis both faced speculative bubble bursts, China’s current challenges are primarily domestic, making their implications distinct. China’s leaders seem to have gleaned lessons from history, adopting a calibrated approach reminiscent of Gorbachev’s “glasnost” and “perestroika.” The fusion of economic restructuring with political rigidity aims to steer clear of the erstwhile Soviet Union’s fate. However, scepticism persists due to China’s complex blend of economic strength and political control.
China’s recent decision to publish less economic data and halt the release of figures for youth unemployment raises concerns about transparency and the ability to accurately assess the country’s economic health. This lack of transparency could complicate the international investor community’s understanding of China’s economic situation, potentially impacting investment decisions. In a recent statement during the 15th BRICS Summit, President Xi Jinping emphasised China’s economic resilience and reaffirmed the enduring factors that underpin its long-term growth trajectory. This sentiment aimed to instil confidence in China’s economic prospects amid the prevailing global uncertainties.
For decades, China’s robust growth significantly influenced global economic dynamics, contributing more than 40% to global growth between 2008 and 2021. This remarkable growth trajectory lifted nearly 800 million people out of extreme poverty, thereby altering global poverty rates. China’s contribution accounted for approximately 45% of the total reduction in the global measure of ‘extreme poverty’ since 1981, demonstrating its pivotal role in global poverty reduction.
Debates arise around the risks posed by a weak or strong China. A robust China under the leadership of Xi Jinping aims to reshape the global order. Conversely, a strongman in a weakening China might prioritise retaining power despite potential global consequences. Amidst the economic slowdown, China’s significance in green technology stands out. Its contributions to wind power, solar capacity, and electric vehicle production could thrive amid global sustainability efforts.
As the world transitions to green energy and departs from austerity policies, questions arise about compensating for the absence of China’s decades-long growth boom. Concerns emerge regarding the global economy’s ability to keep pace with the financial demands of a green transition. The potential of this transition to reshape economic dynamics is significant. Notably, China’s growth rate has slowed from 8 per cent to around 2 per cent annually, raising concerns about the broader impact of such deceleration.
President Biden’s observations connect China’s economic challenges to potential global consequences. An economically weakened China might resort to assertive foreign policies or territorial claims to divert attention from internal issues. Such behaviour could intensify existing geopolitical rivalries, raising the likelihood of diplomatic confrontations. On the domestic front, China’s economic slowdown has the potential to trigger nationalist sentiments and catalyse domestic unrest. The leadership may turn to nationalism as a unifying force, deflecting public attention from economic concerns. This could influence foreign policy decisions and interactions with other nations, heightening tensions in regional disputes or international negotiations. Additionally, the economic slowdown prompts a reconsideration of economic alliances and partnerships. Nations heavily dependent on China’s growth may explore alternative markets and avenues for cooperation to mitigate the impact of China’s challenges on their stability.
China’s economic slowdown transcends national boundaries, resonating globally. Its intricate blend of challenges, responses, and underlying economic structures is shaping China’s future while casting a shadow on the global economic stage. Whether China successfully navigates this period or faces prolonged difficulties, the consequences will extend beyond borders, offering lessons, insights, and challenges for economies worldwide. In this period of uncertainty lies the potential for innovative policies, international collaboration, and the reimagination of growth models that could usher in a new era of economic resilience.
This article is authored by Ananya Raj Kakoti and Gunwant Singh, scholars of international relations, Jawaharlal Nehru University.