China's Economic Conundrum

       China’s Economic Conundrum

China has long been seen as a rival to the United States of America as a global superpower. The emergence of the economy, based on high productivity and a large labour force, has been amplified by high levels of capital investment, both domestically and internationally.

Chinese manufacturing has become some of the most sophisticated and developed in the world. The country’s skilled workers produce everything from phones to textiles, mostly for foreign firms. However, its domestic firms have been growing at rapid rates. However, its economy has been sputtering in recent years, relative to its explosive growth in the 2000s and 2010s. In 2023, the country’s GDP rose by only 5.2% with a prediction of only 4.5% growth this year, according to the IMF. This is puny compared to the growth of other Asian nations such as India and Vietnam.

This slowing in economic growth can be attributed to a variety of factors. The first is a fall in population growth and what some may call a ‘demographic collapse’. While the current situation is not as bleak, in the coming decades, China’s population will start falling. In 2023, it fell by 2.08 million. This is expected to amplify in the coming years.

At the same time, a large proportion of the country’s population will retire in the next few years. These retirees will not contribute to the economy and will expect pension payments from the government, draining its finances. Having once been the reason for China’s growth, its population has come to haunt its economy.

The second factor affecting China is much more serious. The country is facing a property crisis of unbelievable scale. Unwilling to invest in a volatile stock market, Chinese consumers invest in real estate instead. It was seen as a safe investment, which would yield high returns. This self-fulfilling prophecy led to high real estate prices. The property bubble reached such a stage where companies were taking billions of yuan in loans and pre-selling apartments in projects which had not even started construction. This all came to a head during the default of Evergrande, a real estate giant in China. This burst the property bubble and has led to over $4.1 trillion in unfinished projects, unsold flats and unused land.

China also faces a consumption crisis. Consumer demand is not as great as during the peak, pre-COVID period. This has led in part to the economic stagnation of the nation. The fall in consumption in recent years can be attributed to a stigma of saving large portions of income. This, coupled with the lack of investment opportunities in China due to the volatile stock markets and the bursting of the property sector bubble, has led to only 38% of its GDP arising from consumer spending. Far below the 60-70% which is experienced in most developed countries.

Falls in consumer expenditure were mainly observed after the pandemic, due to a relative stagnation in income. Major deflationary pressures plague the country, with the Consumer Price Index (CPI) falling to as low as -0.8% in December. While slowly rising to 0.3% by June of this year, there is a real threat of the economy falling back into a deflationary loop, which could further damage China’s consumption issues.

While seen as a rival to the United States as a global superpower, China faces a damaged perception and a barrage of sanctions by American presidents. These are likely to be followed by the EU and most allies of the west. These sanctions, mostly on emerging technologies such as AI, will damage China’s ability to develop its technology and service sectors, causing productivity to stagnate and fall in the future as other countries capitalise off productivity gains made by AI. As competitors in the manufacturing sector emerge in India and Vietnam, the Chinese economy will suffer as companies shift their production to cheaper and less controversial locations.

While all of this paints a morose picture for the future of China, the government seems to be oblivious of many of these issues. The government, led by Xi Jinping, has paid no service to the issues facing the nation at the recent plenary meeting of the CCP’s central committee. The session which took place from 15th to 18th July, produced a communique stating “we have achieved economic recovery and growth”. The Chinese government continues to use vague buzzwords while failing to propose a strategy which it will pursue in order to achieve their goals. In this year’s meeting, the words “high-quality development” and “Future-oriented industries” were thrown around, with no concrete ways to achieve them.

The only way to solve China’s problems is through government intervention. The CCP has to realise the state of the country and stimulate the economy, especially consumer expenditure. It also has to provide subsidies and grants to its beleaguered property sector. The government has previously enacted economic reforms which have led the country into an economic boom, and it is all on the current one to launch China into a new age. Whether this age will be one of decline or further growth remains to be seen.