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antiquities Disappointing economic recovery In China during the post-pandemic phase Covid-19 There are great doubts about the foundations of the amazing growth that the country has achieved over the decades, and Beijing is faced with a difficult choice in 2024 and beyond: either bear the burden of more debt, or achieve less growth.
Expectations were that once China lifted the strict restrictions it imposed to contain the spread of the Corona virus, consumers would return to shopping malls, the flow of foreign investments would continue, factory activity would increase, and land auctions and home sales would stabilize.
But Chinese shoppers have begun saving in anticipation of a repeat of the bad days, foreign companies have withdrawn money, manufacturers face a decline in demand from the West, local government finances have fluctuated, and real estate developers have defaulted on payments.
The shattered expectations provided some justification for those who have always questioned the Chinese growth model.
China skeptics say Beijing failed to transform the economy from construction-led development to consumption-led growth a decade ago when it should have done so. Since then, debt has outpaced the economy, to the point where local governments and real estate companies are currently struggling to pay their debt services.
Policymakers this year pledged to boost consumption and reduce the economy’s dependence on the real estate sector. Beijing is directing banks to provide more loans to developed industries apart from real estate.
However, a concrete long-term road map for debt settlement and economic restructuring remains elusive.
Whatever choices China will make, it will have to take into account the aging and shrinking population and the difficult geopolitical environment in light of the West’s increasing anxiety about dealing with the country with the second largest economy in the world.
Why is it important?
China’s economy is likely to grow by about 5% in 2023, exceeding the growth speed of the global economy. However, underneath this headline is the fact that China invests more than 40% of its production, which is twice what the United States invests, indicating that a significant portion of it is unproductive.
This means that many Chinese do not feel the growth achieved. Youth unemployment rates exceeded 21% last June, which is the last data to be published before China stopped issuing it, which sparked controversy.
University graduates who studied for jobs in the advanced economy are now working in low-skilled jobs to make ends meet, while the wages of others are being cut. Homeowners feel poorer in an economy where 70% of household wealth is placed in real estate. Even in one of the economy’s few bright spots, the electric vehicle sector, the price war has caused inconvenience for suppliers and workers.
Analysts say that national pessimism may expose President Xi Jinping to risks related to social stability. This will be widely felt, because most global industries rely heavily on suppliers in China. Africa and Latin America depend on China purchasing their basic goods and financing their industrialization.
What about 2024?
The problems China faces give it little time before it is forced to make some difficult choices. Policymakers are keen to change the structure of the economy, but reform has always been difficult in China.
Efforts to boost the well-being of hundreds of millions of rural migrant workers, who by some estimates could add 1.7% of GDP to household consumption if they enjoyed the same public services as urban residents, are already faltering due to concerns about social stability and costs.
China’s efforts to solve its real estate and debt sector problems face similar concerns. Who pays for their bad investments? Banks, state-owned companies, central government, corporations, or households?
Economists say any of these options could mean weak growth in the future. However, China currently seems reluctant to make choices that would sacrifice growth for reform.
Government advisers call for a growth target of 5% for next year.
While this ratio is consistent with his 2023 target, it will not receive the same praise on an annual basis when compared to the lockdown-induced stagnation in 2022.
Such a goal may push China towards more debt, a type of financial easing that led Moody’s to lower its outlook for China’s credit rating to negative this December, pushing Chinese stocks to record their lowest levels in 5 years.
Where this money is spent will indicate whether Beijing changes its approach, or doubles down on a growth model that many fear has come to an end.
