Chinese Economy and Future Trajectory

All these developments prompted US President Joe Biden to refer to the Chinese economy as a “ticking time bomb.” [1] With public discourse varyingly emphasizing "structural" issues like debt, demographics, and China's deteriorating ties with the West, sentiment about China's economy has grown increasingly pessimistic [2].

China has long been called the main force that has been driving global economic growth. However, in recent times, its economic slump has made investors and world leaders wary, and are no longer depending on it to be a stronghold against weakness elsewhere. With the Yuan falling to its record low in August, the central bank initiated the largest currency defense by pegging a rate to the dollar greater than the determined market value [3]. 

The Real Estate Sector:

Based on the construction of infrastructure, exports, and real estate development, the Chinese economy was poised for expansion. But right now, there is a serious problem in the Chinese real estate market. The drive for high-speed railroads and domestic infrastructure laid the groundwork for China's phenomenal economic expansion. There is currently a contention that Beijing no longer has the desire or need for either [4].

The Evergrande crisis of 2021 brought to light the difficulties facing the real estate industry and the imminent bust of the bubble. Many of the houses that were supposed to be sold have not been sold, suppliers are still waiting on payment, and the Chinese investors in these projects might never see their money returned. Similar concerns are now being projected for the Country Garden constructor [5]. With a focus on residential real estate, Country Garden was the largest real estate developer in China until the previous year. Based in Foshan, Guangdong province, and listed in Hong Kong, the corporation has developed 3,000 projects nationwide and turned over 1,400 rural communities into cities. Recently, the company has been facing financial challenges. In September, compared to the same month the previous year, its apartment sales dropped by 81%. For the first half of 2023, the developer declared a $7 billion loss that set a record [6]. Furthermore, the International Monetary Fund (IMF) in its regional economic outlook report released in October, downgraded China's growth projection for 2023 and 2024 attributing the economic slowdown to the weak real estate and property sector [7].

Deflation Challenge:

When consumer prices fell in July for the first time in more than two years, China's economy descended into deflation. Inflation was measured by the official consumer price index, which decreased by 0.3% from a year ago. As a result, some analysts are of the view that this puts more pressure on the government to boost demand [8]. China saw a decrease in the price of food, transportation, and home items in July, according to a CNN report. More specifically, costs for vegetables were down 1.5% and pork was down 26% [9]. For once, the prolonged deflation in China might be beneficial in containing growing prices elsewhere in the world as a result of China's continued status as one of the world's top producers of goods. Conversely, a decrease in the cost of Chinese-made items could affect employment by reducing corporate investment. Therefore, even while initially profitable for consumers, price reductions may trigger a vicious cycle of declining economic activity. Due to a persistent downward pricing trend, there would be less demand, which would result in less corporate revenues, lower production, and higher unemployment—all of which would further depress consumer spending [10].

Furthermore, due to unclear demands in the future, businesses may reduce investment and production, which would raise unemployment. As a result, overall consumption is further decreased, repeating the cycle. Any monetary policy the People's Bank of China implements may prove ineffectual in a deflationary environment, making it challenging to stimulate the economy further. Deflation can compound the already-escalating provincial government debt issues as well as cause slower economic development and higher unemployment. These forecasts are coming true in the case of China. The industrial enterprises' overall profits from January to July 2023 showed a 15.5% year-over-year decline. Since April 2023, the Manufacturing Purchasing Managers' Index has been below 50, suggesting a decline in the manufacturing industry as a whole. June 2023 saw a 21.3% youth unemployment rate. The combined debt of urban investment corporations and local governments in China has surpassed 100 trillion yuan (USD13 trillion) and the chance of default has grown because of the economic downturn [11].

Drop in exports:

According to recent US Census Bureau data, the import of commodities from China into the US dropped to its lowest point since 2006. During the time, the percentage of goods imported from China was 14.6% marking a decrease from a peak of 21.8% in the year that ended in March 2018, prior to the US-China trade conflict being intensified by then-US President Donald Trump. The Chinese government has refrained from initiating a significant stimulus package to stimulate the economy thus far. Rather, in recent months, it has chosen to implement a number of policies aimed at providing assistance to individuals and enterprises. The nation's central bank has lowered interest rates, and the government has said that it will permit the reduction of minimum deposits required for purchasers in twelve of the nation's largest cities. Additionally, lenders are also being urged to lower interest rates on current mortgages. Further initiatives, such as lowering the share trading duty and raising personal income tax deductions for children's education, have also been announced [12].

The consequences of the economic slowdown:

Morgan Stanley and Goldman Sachs Group Inc. have lowered their targets for Chinese stocks, with the former citing potential negative ripple effects on the rest of the region. Furthermore, over USD 10 billion has already been removed from China's stock exchanges by foreign investors, the majority of whom were involved in the sale of blue chips. China reducing its imports of automobiles and electronics has caused Japan to report its first export decline in almost two years in July. Central bankers from Thailand and South Korea have also downgraded their growth projections due to China's sluggish recovery. From a different perspective, a decline in oil prices and deflation is lowering the cost of commodities sold outside inadvertently favoring other nations like the USA and the UK that are still struggling with high rates of inflation. In this regard, some developing nations, particularly India, perceive prospects and aspire to draw in the foreign capital that might be departing from China [13].

The economic slowdown is also likely to affect Chinese investments overseas. Countries, where Chinese funds have been used to construct highways, airports, seaports, bridges, and other infrastructure, might see less dedication from their Chinese partners in light of the economic challenges. Some analysts argue that it is likely to lead to some political counterbalancing like China may try to mend strained relations with the USA if it becomes more vulnerable economically. US Commerce Secretary Gina Raimondo recently labeled China "uninvestable" for certain American companies, and trade restrictions have played a factor in the 25% decline in Chinese exports to the USA in the first half of this year. However, there is no proof yet that China's stance is changing as China regularly criticizes the "Cold War mentality" of Western nations and maintains the status quo [14]. The perceptions regarding the economic slowdown in China seem to be multifaceted. While the ripple effects of a slump in the world’s second-largest economy can be felt globally, it is also seen as an opportunity for other economies. However, Asian and African economies that remain heavily dependent on the Chinese economy will be the ones to suffer the most in this scenario. 

Future trajectory:

Some economists have raised concerns about China's potential inability to achieve its 2023 economic growth target of 5% due to weak data readings, while there is still a lack of clarity over the government's willingness to undertake significant fiscal stimulus in light of the country's high municipal debt levels [15].

During the 2008–2009 global financial crisis and the 2015 scare of capital outflow, warning signs regarding the state of the economy were raised. China, among other actions, encouraged property market speculation and gave infrastructure spending a shock boost in order to restore confidence at the time. However, the property sector is struggling and the infrastructure upgrades have created an excessive amount of debt. In this regard, China's ability to recover primarily rests on its ability to persuade people to spend more and save less and to do so to the point that the increase in consumer demand offsets any weaknesses in the economy elsewhere. Some economists are of the view that measures like large tax cuts, government-funded consumer vouchers, improving and expanding public services, promoting faster wage growth, and creating a social safety net with greater pensions and unemployment benefits, are some of the options that can boost the household consumption share in the GDP [16].

Endnotes:

1.     Sheersh Kapoor, Explained: What’s causing China’s economic slowdown and its global impact. BFSI Economic Times, 30 August 2023 https://bfsi.economictimes.indiatimes.com/news/industry/explained-whats-causing-chinas-economic-slowdown-and-its-global-impact/103206817

2.    Scott Kennedy Logan Wright John L. Holden and Claire Reade, Experts React: China’s Economic Slowdown: Causes and Implications, Center for Strategic and International Studies, 30 August 2023 https://www.csis.org/analysis/experts-react-chinas-economic-slowdown-causes-and-implications

3.    Laura He, China’s economy is in trouble. Here’s what’s gone wrong, CNN Business, 23 August 2023 https://edition.cnn.com/2023/08/21/economy/china-economy-troubles-intl-hnk/index.html

4.    Gunjan Singh, Exports, Infrastructure, and Real Estate: Deciphering China's Economic Slowdown, The Quint, 06 September 2023 https://www.thequint.com/opinion/exports-infrastructure-and-real-estate-deciphering-chinas-economic-slowdown#read-more

5.    Gunjan Singh, Exports, Infrastructure, and Real Estate: Deciphering China's Economic Slowdown, The Quint, 06 September 2023 https://www.thequint.com/opinion/exports-infrastructure-and-real-estate-deciphering-chinas-economic-slowdown

6.    Michelle Toh, Laura He and Diksha Madhok, How Country Garden became the new face of China’s spiraling property crisis, CNN, 27 October 2023 https://edition.cnn.com/2023/10/26/business/how-country-garden-became-the-new-face-of-chinas-spiraling-property-crisis/index.html

7.    Shashwat Sankranti, China’s property market could slow down Asia's economy: IMF, WION, 18 October 2023 https://www.wionews.com/business-economy/chinas-property-market-could-slow-down-asias-economy-imf-648293

8.    Annabelle Liang & Nick Marsh, Deflation: Why falling prices in China raise concerns, BBC, 09 August 2023 https://www.bbc.com/news/business-66435870

9.    Sayantani Biswas, China slips into deflation. How will this affect Indian economy?, Live Mint, 10 August 2023 https://www.livemint.com/economy/china-slips-into-deflation-how-will-this-affect-indian-economy-11691672657687.html

10.  Sayantani Biswas, China slips into deflation. How will this affect Indian economy?, Live Mint, 10 August 2023 https://www.livemint.com/economy/china-slips-into-deflation-how-will-this-affect-indian-economy-11691672657687.html

11.    He-Ling Shi, China’s unspoken deflation challenge, East Asia Forum, 21 October 2023 https://www.eastasiaforum.org/2023/10/21/chinas-unspoken-deflation-challenge/

12.   Peter Hoskins, China exports fall again as economy struggles, BBC, 07 September 2023 https://www.bbc.com/news/business-66737102

13.   China’s worsening economic slowdown is rippling across the globe, The Hindu Business Line, 28 August 2023 https://www.thehindubusinessline.com/news/world/chinas-worsening-economic-slowdown-is-rippling-across-the-globe/article67243645.ece

14.  Nick Marsh, What China's economic problems mean for the world, BBC, 29 September 2023 https://www.bbc.com/news/business-66840367

15.   Why is China's economy slowing down and could it get worse?, Reuters, 01 September 2023 https://www.reuters.com/markets/asia/why-is-chinas-economy-slowing-down-could-it-get-worse-2023-09-01/

16.  Why is China's economy slowing down and could it get worse?, Reuters, 01 September 2023 https://www.reuters.com/markets/asia/why-is-chinas-economy-slowing-down-could-it-get-worse-2023-09-01/

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(The views expressed are those of the author and do not represen views of CESCUBE.)