Over the last 25 years, China has been recognized for its incredible growth and rising prosperity. With a population of 1.4 billion, the country has been a significant driving force in the global economy, with an increasing demand for goods worldwide. However, recent developments have created uncertainties that could put Chinese households and economies worldwide at risk.
A series of events has intensified these risks in the past few weeks. First, there has been a significant slowdown in China’s economy during the spring, which has dashed hopes of a robust expansion after lifting extreme COVID restrictions. Moreover, data has shown that China’s exports have declined for three consecutive months, while imports have dropped for five straight months. These figures suggest bleak prospects for the Chinese economy.
Difficulties for Chinese Workers and Households
Additionally, the prices of various goods, including food and apartments, have fallen, increasing concerns that China might be on the verge of deflation. Deflation is a sustained price decrease, often indicative of weak commercial activity.
China’s housing market has also worsened, with primary real estate developer Country Garden missing bond payments and estimating losses of up to $7.6 billion in the year’s first half.
These developments have created difficulties for Chinese workers and households. On a global level, the weakening Chinese economy points towards reduced demand for primary goods, ranging from Brazilian soybeans to American beef and Italian luxury goods. It also signals a diminished appetite for oil, minerals, and other industrial essentials.
The global economic outlook will undoubtedly be significantly impacted by the current slowdown in China, according to Larry Hu, the chief China economist for Macquarie. As the world’s number one consumer of commodities, China’s decline in demand for goods will considerably affect the worldwide economy. Additionally, a recent analysis from BCA Research reveals that China has contributed more than 40% of global economic growth over the past decade, compared to 22% from the United States and 9% from the 20 countries using the euro currency.
Proposed Government Spending Programs
However, concerns have been raised that the Chinese authorities may need more options to stimulate the economy as they face mounting debts, estimated at 282% of national output, exceeding that of the United States. These factors have caused alarm within China and in economies worldwide, raising concerns about the future of global economic stability.
The proposed government spending programs aimed at boosting consumer spending and business investment need more specific details, leaving concerns that local governments may bear the burden. The heavy borrowing by local governments for infrastructure projects in the past has led to worries about the debt crisis. China’s Communist Party attempted to lift from a state-directed investment economy focused on infrastructure and exports to a consumer-driven domestic economy. The previous economic model was successful for two decades, with government-funded projects supporting an export-led factory boom and private entrepreneurs establishing innovative technology companies.
However, regulatory actions led by President Xi Jinping have imposed restrictions on these entrepreneurs in recent years. The country’s significant export country’s loss of domestic manufacturing jobs has led to trade conflicts, particularly with the United States, where tariffs have been imposed on Chinese imports. The Biden administration has continued this policy and expanded restrictions on investment in critical Chinese sectors, such as advanced computer chips, while signing an executive order prohibiting investment in industries that could enhance China’s military capabilities.
More and more youths are jobless following the pandemic as China’s economy is struggling. Some people are forced to stick with low-paying jobs and are barely staying afloat, but this only refers to those who are actively looking for jobs.https://t.co/6PgGYeriIB pic.twitter.com/A4UJft9Wdp
— China in Focus – NTD (@ChinaInFocusNTD) August 3, 2023
China Deflation on Society
After several public protests in December, the controls were lifted, hoping to stimulate consumer spending. However, despite this move, consumer spending has remained low. So, China’s National Bureau of Statistics recently suspended data releases highlighting the country’s economic issues.
China country households traditionally have high savings rates due to limited social safety nets. In the first half of this year, total household deposits in the Chinese banking system increased by about 12 trillion Chinese yuan (approximately $1.7 trillion). This expansion is the most significant in a decade. However, the increase in savings, coupled with low investment and consumer spending, suggests a decline in public confidence.
The pandemic has led to inconsistent policies, swinging from total lockdown to no controls, which economist Adam Posen calls “economic long COVID.” Given the country’s history of halted projects, Chinese consumers are becoming more cautious about real estate investments. This situation is similar to Japan’s experience in the 1990sJapan’seal estate bubble burst, leading to decades of economic decline. The fear of deflation, which affected Japan, is now a concern for China.
The impact of deflation on society can be significant. It can lead to a decline in spending, business expansion, and hiring due to the expectation of lower prices. This rational thrift can ultimately lead to societal decay. However, many economists believe China can avoid this fate, as falling prices could soon reverse. Additionally, the government is shifting towards a more pro-growth and pro-business mindset, which is crucial for boosting domestic demand.
Efforts to Manage Gradual Economic Slowdown
Ideally, the government will facilitate a gradual transition to slower growth, focusing on service-oriented jobs while managing real estate losses. However, the worst-case scenario could occur if the existing debt burden limits the government’s response. This government’s sharp decline in housing prices, costly rescues of struggling lenders, and significant capital outflows from the country.
It is crucial to monitor how China tackles these challenges and their potential consequences on the economy. Government officials are worried about job losses, business bankruptcies, and social unrest that could result from the downturn.
Even though further economic stimulation could worsen the existing financial threats and increase debt, the government will try to stimulate the economy further.
Despite the government’s efforts to manage the economic slowdown, significant challenges could still cause volatility. The emphasis on domestic consumption and shifting manufacturing jobs from China to other countries may reduce wages and household wealth. In a country where an unelected party holds power, the loss of trust from many people could create turbulence. Moreover, the decline in exports also leads to a decrease in importance. This decline creates a negative feedback loop that impacts economic prosperity.
China’s Economic Challenges
China has some economic challenges as its recovery from COVID-19 restrictions falters, and trade with the rest of the world is shrinking. Additionally, a decade-long boom in house prices has ended, and the country is now officially in deflation. While costs are rising in the U.S., the U.K., and the eurozone, in China, they are falling. President Xi Jinping has no natural alternative but to stick to his rebalancing strategy, which may take some time. China’s economy grew strongly during the pandemic. But now, the country has many underutilized factories and homes that nobody wants to buy.
It is unlikely that Beijing will adopt a hands-off approach to the economy even though there is deflation in China. The authorities will probably stimulate demand through lower interest rates and government spending. However, the interventions could be smaller and more targeted than in the past. According to China expert George Magnus, the country’s long-term sustainability rate is now lower at 2-3%, compared to 10% after the global financial crisis. Achieving better-balanced growth will be a challenging and obstacle-filled journey.
Written by Janet Grace Ortigas
The New York Times: China’s Stalling Economy PutsChina’srld on Notice; By Peter S. Goodman
Financial Post: China’s deflation woes a warnChina’sn about global economic growth, economists say
The Guardian: China’s economy is strugglingChina’sars of sustained deflation are premature; By Larry Elliott
CNBC: China has announced a slew of measures to bolster its economy. Here’s what we know so far; By Clement Tan
Featured and Top Image Image by Shih-Chieh “Ilya” Li Courtesy of Flickr “Cre” tive Commons License
First Inset Image by Shih-Chieh “Ilya” Li Courtesy of Flickr “Cre” tive Commons License
Second Inset Image by Sodai Gomi Courtesy of Flickr – Creative Commons License
