Five questions about what is happening to the Chinese economy

So, has China now entered a longer period of reduced growth?

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Illustration, Photo: Reuters/Thomas White
Illustration, Photo: Reuters/Thomas White
Disclaimer: The translations are mostly done through AI translator and might not be 100% accurate.

Since China began opening up and reforming its economy in 1978, its GDP growth has averaged over nine percent per year.

When the covid-19 pandemic ravaged what has since become a global growth engine, it recorded the lowest growth in decades - only 2,2 percent in 2020.

The following year, it recovered and jumped to more than eight percent, but in 2022 it managed to grow by only three percent.

So, has China now entered a longer period of reduced growth?

Here we list five key questions about what could have gone wrong with China's economy and what it might mean for us in the rest of the world.

1. What is happening to the Chinese economy?

In January, China announced that its economy will grow by 2023 percent in 5,2, which means that, when it comes to the growth rate, only India is ahead of it among the world's leading economic powers.

China's economy is more than five times larger than India's.

But in the country itself, people feel it differently.

During 2023, there was a net outflow of foreign investment from China for the first time in the last five years; youth unemployment reached a record high of more than 20 percent in June last year; and the stock market reached a record low in the last five years at the beginning of the year.

A small number of angry Chinese have been expressing their displeasure with their own country's economic downturn on the Weibo account of the US Embassy in China for much of the past year.

One user called for help because he is "unemployed for a long time and in debt".

Another post talked about losing money in the stock market and wondered if the US government could "lend us some rockets to bomb the Shanghai Stock Exchange."

But many of the comments were later deleted, according to Western media reports.

Lin Song, chief economist for Greater China at the Dutch bank ING, says that the reason for China's weaker recovery from the Covid-19 pandemic is that, "unlike most other countries, China has not used ultra-aggressive policies to stimulate growth".

Other countries such as the United States have implemented emergency plans to help the economy recover from covid.

The $1,9 trillion U.S. plan offered support to the unemployed and extra help to small businesses, state and local governments during the pandemic.

"China's economic policy has always been more restrained. As a result, inflation was not a problem in China, but the economic recovery was also weaker," explains Song.

Reuters

Wang Tao from the investment bank UBS points out the second big reason behind the weak recovery.

"China is in the midst of the worst economic and real estate downturn in its history.

"More than 60 percent of the wealth of Chinese households is in real estate. When house prices fall, people are understandably less willing to spend, especially the middle class. For example, a clear indicator of this is that the purchase of large appliances has dropped significantly," she adds.

Problems in China's real estate market have a huge impact, as this sector makes up a third of the economy.

The industry faces a huge financial squeeze from 2021, when authorities introduce measures to limit how much big property companies can borrow.

For years, China's real estate sector has raised funds for new projects by borrowing from banks, issuing bonds and selling new homes to buyers in advance.

This business model has existed for a long time in many countries, but Chinese investors have over-indebted themselves by borrowing too much money.

In recent years, several major real estate developers have defaulted on debt.

Many Chinese have paid these developers up front for apartments that have yet to be built or are half-finished, and now face the possibility of losing money, which for some is their entire life savings.

Local governments, which have borrowed billions to build infrastructure and rely on land sales for revenue, have also come under heavy pressure.

Their debt reached 92 trillion yuan ($12,6 trillion), or 76 percent of China's economic output in 2022, a jump from 62,2 percent in 2019, according to the International Monetary Fund.

However, for Tianchen Shu, senior economist of the Economist Intelligence Unit, "the Chinese economy is definitely not in crisis."

His view is that China's growth in the 2010s was "fueled" by credit that fueled rapid expansion, so real estate and infrastructure experienced a boom.

"As China rebalances that model, a correction is practically inevitable," he told the BBC.

"It seems like a huge machine that has gotten tired and some cracks are starting to show in some of its parts."

2. Will the Chinese economy threaten the American one?

When China became the second largest economic power in 2010, by GDP, it was predicted that it would overtake the US, and most believed that it was only a matter of time before that would happen.

This is because there has been an impressive economic expansion in the country: in the two decades to 2010, China recorded double-digit annual growth in two periods: 1992-1995 and 2003-2007.

Before the slowdown, the most optimistic estimate for China overtaking America was 2028, while the most pessimistic was 2032.

But now, given all the current economic uncertainties, can China pull it off?

"Yes, but probably not for another few years," says Professor Li Cheng, founder and director of the Center for Contemporary China and the World (CCCV) at the University of Hong Kong and former head of the China Center at the Brookings Institution in Washington.

Shu gives a more specific answer: in the 2040s, he says.

Professor Lee explains that the US faces a number of uncertainties, including its presidential election near the end of the year.

"It's not smooth sailing for America, with its brutal bipartisanship, racial tensions, immigration policy - there are a lot of uncertainties that have to be taken into account.

"As for China, new advantages have emerged, for example, within a few years it has become a leader in the electric car industry, which surprised many."

"But the bad news for China is its aging society. By comparison, the US, which has a higher birth rate than China and an immigrant population that replaces the labor force, is under much less pressure."

Professor Andrew Merta, director of the SAIS China Global Research Center at Johns Hopkins University in the US, assumes that the Chinese leadership also has some doubts.

"China may not even want to overtake the US when it comes to the risk of economic slippage.

"Given its lower projected growth rate, the housing crisis and the global recalibration of supply chains, China's leadership appears to be somewhat risk-averse and less inclined to venture into bold economic initiatives that would alter American supremacy."

3. What could be the consequences for China?

The term "lost decade" - the predicted extended period of economic stagnation - is often mentioned when this question is raised.

Behind the numbers, Song believes that the negative confidence effect's feedback loop is holding the economy back - a lack of confidence reduces investment and spending, which in turn reduces corporate earnings.

And this is reflected in lower property prices, which is again maintained by weaker self-confidence, and so on, in a circle.

"We need a supportive policy to get out of this."

Some fear that Chinese President Xi Jinping might invade Taiwan in order to alleviate internal discontent.

China sees an independent Taiwan as a breakaway province that will one day return to Beijing's control.

Professor Merta believes it would be "more than a rash move - but I expect more and more gun rattling as a way to unite the country around the flag."

Professor Lee warns that “anyone who wants a war over Taiwan, whether it's politicians in China, the US or Taiwan, better think twice; this war will be different from Ukraine."

"It could be the first war with the help of artificial intelligence. It will be a high-tech war without reservation, a war of machines against machines."

"Of course, Taiwan is a key issue for China, but the Chinese leadership is also aware that war is a last resort, and economic stagnation is not enough of a reason."


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4. How will the slowdown affect the world economy?

Shu believes that it will affect the world in three ways: through goods, Chinese tourism and geopolitics.

"First, since China is a major importer of commodities, the slowdown means less demand for them, especially those used in construction, such as iron ore and bauxite.

"Secondly, the withdrawal of Chinese tourists will represent a loss for major destinations - outbound tourism will have trouble returning to pre-pandemic heights.

"Third, a slowdown - especially if accompanied by a public finance crisis at home - will limit China's ability to shape geopolitics through aid and official credit."

Over the last decade, China has launched the Belt and Road Initiative to impose a global presence through a large number of investments and infrastructure projects.

It has signed contracts with 152 countries and invested in more than 3.000 projects.

But some critics have also pointed out that the Belt and Road Initiative has resulted in "debt traps," with China becoming the lender of first resort for many low- and middle-income countries through the Initiative.

A 2022 World Bank report stated that China is the largest bilateral creditor of the Maldives, Pakistan and Sri Lanka.

Xi Jinping's latest investment pledges, reported during the March sessions of the National People's Congress, were significantly toned down from earlier.

This suggests that massive outward investment is unsustainable amid China's economic downturn.

But Song points out that even with the slowdown, the sheer size of China's economy will still allow it to be a major contributor to global growth.

"China is still likely to account for 20 percent or more of global growth over the next five years."

5. Can China rise again?

Song believes that the next stage for China is to successfully complete the economic transition to higher-quality growth and climb the value-added ladder.

"The two sessions of the National People's Congress have shown that politicians continue to be focused on that bigger picture and longer-term priorities, which will ultimately decide whether China can move to the next stage."

Shu has these suggestions.

"It is crucial for China to start treating the real estate crisis more responsibly.

"Secondly, it should focus on demand, instead of focusing exclusively on the supply side of the economy.

"China should also liberalize more pockets of the economy for private and foreign firms, and implement fiscal reform to ensure the long-term sustainability of public finances, after more than a decade of fiscal expansion."

In the meantime, Song believes China's leadership will focus on achieving the five percent GDP growth target outlined at the National People's Congress.

"And while we have seen moderately more supportive fiscal policy targets, we still need to see the implementation of more stimulative policies in the coming weeks and months to achieve the 2024 growth target."


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