Exports have slumped, growth has stalled, and the economy even slipped into deflation. The youth unemployment figures have become so bad that the government has stopped publishing them.
These figures – or their absence – reveal more than an economy struggling to grow after Covid. What they demonstrate is that China’s high growth model over the past few decades has run out of steam.
Many of China’s immediate problems can be traced back to problems in its enormous property market.
The sector is hugely important to the Chinese economy and makes up around 30 percent of its GDP.
Private and state property developers have helped drive the largest spate of urbanization in history, with the proportion of the population living in cities rising from 36 percent in 2000 to over 65 percent last year.
This generated a huge bubble, with property developers taking on big debts to build enough houses. Rupert Thompson, the chief economist at Kingswood Group, said the situation “was an accident waiting to happen.”
In 2020, the Chinese government attempted to deflate the bubble with its Three Red Lines policy, which tried to regulate the amount of debt developers could take on.
But the policy was too aggressive, effectively bankrupting the country’s largest property developer Evergrande. This snowballed into a wider crisis in which many smaller developers also defaulted.
The ensuing slowdown in the sector sparked by the panic has hit even developers previously seen as reliable. Country Garden, previously considered one of the most reliable developers, missed payments on some of its bonds at the beginning of this month, reigniting fears that the property sector could crash the wider economy.
Many analysts have pointed to the similarities between the current situation in China and what happened in Japan in the 1990s. In Japan, a debt-fuelled property bubble imploded, leaving the country with two decades of lost growth as consumers and corporates sought to deleverage.
Although there is no doubt about the severity of the problem, experts suggest the government should take action rather than risk a full-blown crisis.
“I don’t think the government will let the real estate crisis spill over very extensively because that would be very bad. I think this risk will be contained, but I think the market will be nervous,” Janet Mui, head of market analysis at RBC Brewin Dolphin, told City A.M.
The response is likely to be targeted, she said, rather than the kind of massive stimulus seen around the financial crisis for fear that too large an intervention would simply reinflate the bubble.
Julian Evans-Pritchard, head of China Economics at Capital Economics, agreed. “Policymakers appear concerned that their traditional policy playbook would lead to a further rise in debt levels that would come back to bite them in the future”.
Leaving aside issues in the real estate sector, the Chinese economy faces a set of structural issues that are holding back growth.
The world’s second-largest economy has been powered by an investment-led growth model, which has turbocharged its economy over the past three decades. Investment currently makes up between 40-45 percent of GDP compared to an average of around 20-25 percent among the rest of the world. But now, the economy is essentially saturated with productive physical assets. Further investment, particularly if directed to physical infrastructure, will be unlikely to improve the underlying performance.
In order to generate sustainable growth over the longer term, the Chinese government is trying to lift domestic consumption, which currently makes up a very small proportion of GDP.
In the US, for example, consumption makes up nearly 70 percent of GDP, while it tops 63 percent in the UK. Chinese consumption, in contrast, makes up less than 40 percent of GDP.
“It is the wish of the Chinese government to shift from old style, industrial production and fixed investment to consumption,” Mui said.
Experts argue the government could boost the social safety net, which would encourage citizens to spend rather than save in case they fall on hard times. The savings rate in China is currently much higher than in many Western countries, partly because there is limited state support.
Another impediment to higher domestic consumption is China’s artificially devalued currency, the yuan. Although the devalued yuan supports an export-led economy, it also makes imports for domestic consumers more expensive than they would be.
But Mui said it would be “very hard to stimulate consumption meaningfully”.
More broadly, China’s aging population also poses significant threats to its future growth.
China’s population has peaked, and after the one-child policy, it is deeply top-heavy. It will likely be a major constraint on its ability to grow in the future.
With all these issues, Evans-Pritchard notes: “The big picture is that trend growth has fallen substantially since the start of the pandemic and looks set to decline further over the medium term.”
While Chinese growth is expected to reach nearly five percent this year, the days of a growth rate nearing 10 percent appear to be well and truly over.
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