China’s Economic turbulence: A dragon at rest?
China, the world’s second-largest economy, has been making headlines for all the wrong reasons lately. The dragon’s mighty roar seems to have turned into a subdued purr as it navigates a series of economic challenges.
Economic indicators data hush-up
One notable move is China’s decision to stop publishing unemployment data (as the rate climbed to a staggering record high of 21 % ). Also, it has been gradually reducing the publication of various statistical data in recent years.
It has also warned its economists not to show the economy in a negative light.
A whiff of recession
China is on the brink of a recession. In the second quarter of 2023, its economic growth slowed down significantly, limping at a mere 0.8%. That’s quite a departure from the double-digit growth figures we’ve grown accustomed to hearing.
Over the past three decades, China’s growth had become the driving force behind global economic expansion, and it is now experiencing a notable slowdown.
Deflation’s chilly embrace
To add to its woes, China is grappling with deflation. The consumer price index took a dip, declining by 0.3% in July year on year.
While many countries around the world are increasing interest rates to combat inflation, China’s Central Bank is taking the opposite approach by cutting rates.
China’s central bank cut interest rates for the second time in 3 months to boost economic recovery.
The Real estate Rollercoaster
The most critical factor in China’s economic downturn is the collapse of the real estate sector. This sector has been the engine driving China’s growth, accounting for a whopping 30% of the nation’s GDP.
Back in 1998, the Chinese government, after years of resistance, opened the door to private players, leasing state-owned land to private developers for residential facilities nationwide. A debt-fueled construction boom ensued, driven by a rising population and surging housing prices.
However, population growth has hit the brakes, and the government has clamped down on excessive debt, sending shockwaves through the real estate market. Also, frequent lockdowns due to COVID have dampened consumers sentiments.
Falling prices and mounting inventory have shaken the sector to its core.
Major real-estate developers like Evergrande and Country garden have defaulted on their debt re-payments.
The investment conundrum
China’s economic growth in the past leaned heavily on investment, far more than household consumption. But this strategy is losing its magic touch. Many investments have become unproductive, leading to a massive debt pile, equivalent to about 300% of China’s economic output.
As Vox put it-
“A chunk of investments are unproductive — for example, a shiny new airport is great, but if it sits empty and no one travels through it, that’s not a great return on investment. But whether the airport is busy or a ghost town, it required bonds and loans to build. That produced growth, but it also increased China’s debt, so much so that right now, it’s triple — yep, around 300 percent — the amount of China’s economic output. “That doesn’t really matter until the debt has to be settled. More stimulus simply increases debt and delays the reckoning,” Morgan said.”
Foreign Investment Exodus
China’s economic woes aren’t limited to domestic issues. A crackdown on foreign investment, coupled with a hardline approach from President Xi Jinping, has led to a sharp decline in foreign direct investment (FDI), plummeting by $100 billion to just $20 billion in the first three months of 2023.
There’s also a trade war with the United States.
Apart from the US, even other countries like Japan, Europe etc want to diversify their manufacturing from China .
Tech Troubles and Export Exodus
China’s tech sector took a hit when Ant Group’s IPO was scuttled as its founder Jack Ma openly criticised the Chinese Government. Sringent regulations on the sector also led to significant job cuts.
Exports, the lifeblood of China’s economy, have also hit a three-year low due to inflationary pressures in Western countries.
Commitment to zero-Covid strategy
Lastly, China was the only country relying on lockdowns till the end of 2022. Three years of stringent restrictions have impacted manufacturing and supressed consumer demand and caused significant economic damage.
Why is the China slowdown also called ‘Japanification”?
Some observers have likened China’s current economic woes to Japan’s situation in the 1990s, a period known as ‘Japanification.’ Both countries experienced a debt binge in their real estate sectors, followed by decades of lost economic growth and deflation.
Another similarity is the demographic transition.
The share of aged population (65 and above) was 12.7% in 1991 in Japan, similar to China in 2019 (12.6%).
Conclusion (China slowdown)
To conclude, as China grapples with these complex economic challenges, it’s clear that the dragon’s path is now filled with obstacles. However, China has shown resilience in the face of adversity before. The question remains whether it can rekindle its economic fire or if the dragon’s rest will be a prolonged one.