China’s economy has peaked, and a painful recovery lies ahead.
Reports on China’s emerging economic crisis have been mixed. These assessments often draw from limited data and can be influenced by the geopolitical dispositions of the authors’ respective countries. However, it’s crucial not to underestimate the seriousness of the economic challenges the dragon-nation is currently facing. These challenges have significantly impacted the plight of its residents, as well as the nation’s future prospects. There are obvious signs that its economy has peaked, and the ongoing century is not likely to be the “Chinese century” as was believed by economic and political commentators around the globe not too long ago.
Over the course of this year, China’s economic slowdown, evident across various macroeconomic indicators, has come to the fore. In the first half of the current financial, GDP growth has fallen by 50% from the previous year’s 8%.
Unemployment has swelled and gone beyond 20% amongst the urban youth. Exports, the mainstay of its huge manufacturing base, have fallen by a third. The giant nation faces deflation, which has the potential of turning into a recession. The anticipated post-pandemic economic revival has yet to materialize, while national debt continues to balloon.
Foreign investment, a source of vital funds, knowledge, and management expertise, is dwindling rapidly. Changes in government policies towards increased state control over the economy have led to uncertainty and eroded consumer confidence. Well known technology czars and other rich businessmen have left the country in search of overseas havens to invest. With the choking of institutional finance along with the disappearance of most purchasers of their produce, thousands of small businesses have shut shop.
The once-thriving real estate industry has virtually come to a standstill, with property developers both small and large teetering on the verge of financial collapse. The industry’s downturn was partly triggered by President Xi Jinping’s observation a couple of years ago that money was being borrowed for speculative purposes rather than meeting genuine housing requirements. Historically, housing had been the primary, if not the sole avenue for most middle-class families, who were offered mortgages well before the apartments were constructed and occupied. The tightening of funding streams has left developers and retail borrowers in dire straits. Over a million incomplete or unoccupied apartments in metro towns alone have further exacerbated the loss of consumer confidence.
Cumulatively, the size of the Chinese real estate and related sectors had been estimated at 30% of GDP in a 2020 paper by economists Ken Rogoff and Yuanchan Yang. They noted that the activity was largely financed by the highly opaque $2.9 trillion trust industry. The looming bankruptcy of major real estate players like Country Garden and Evergrande poses a severe risk, potentially dragging other significant lenders and the aspirations of millions of middle class to own homes .
With labour-intensive industries like construction and general manufacturing in doldrums, the overall levels of employment have taken a perceptible hit. The educated youth, in particular, find themselves severely handicapped. Most of the 11.4 million students graduating out of colleges annually face grim prospects of finding their preferred jobs in industries such as IT, entertainment, or education. In fact, they might not find employment in urban settings altogether. President Xi’s advice to them is to “taste bitterness,” implying a shift to rural areas where they should accept whatever opportunities come their way. This occurs against a backdrop of declining fertility rates and a shrinking population, with fertility rate going below the replacement ratio of 2 children per couple. By 2050, the working-age population could decrease by almost a quarter, potentially hampering long-term economic growth. The hitherto drivers of national progress—readily available labour, affordable wages, and relatively high productivity—are clearly facing disruption.
China’s present predicament is especially striking when juxtaposed against its accomplishments over the past four decades—progress that began ever since Deng Xiaoping, the pragmatic successor of Mao Tse Tung, had in a rare visit to the United States in 1976, assured the free world of China’s readiness to change track, set new goals, and adopt policies to enlarge the size of the pie rather than remain concerned with the social and distributive aspects of growth, commonly referred as “common prosperity”. True to his word, over the following years, he overhauled the entire administrative apparatus of the country and transformed the nation’s overall outlook into welcoming private enterprise and capital, especially foreign. The outcome was positive, rapid, and substantive.
Since 1981, China has accounted for a staggering 45% of the total reduction in extreme poverty globally and accounted for 60% of people worldwide who went above the “$5 a day” mark. In fact, these advances were so remarkable that in a 2022 essay focused on tracing the global slowdown, researchers David Oaks and Henry Williams noted, “The global gains of the last four decades weren’t really global but Chinese.” According to World Bank data, between 2008 and 2021, the world’s per capita income grew by 30%, while China recorded a 12-fold greater increase of 263%. China accounted for 40% of all global growth. Without China, the global GDP would have risen by 33% and not 51%, and the per capita income by only 12% instead of 30%.
As David Wallace-Wells, a staff writer at the New York Times, explains: “China reshaped the world’s markets, becoming a natural commercial hub, infrastructure leader, universal trade partner, and demand-sponge, soaking up much of what Asia had to offer or make.” As a result of this “soaking,” some countries prematurely “deindustrialized,” leaving them ill-equipped to navigate the new landscape on their own—this includes nations of East and Southeast Asia, which are closely tied to China, and to some extent the United States as well. The economic fate of more than a handful of nations, and the economic arc of the world more broadly, now stands inextricably tied to China’s economic fate.
Unsurprisingly, such interdependence has many nations concerned irrespective of their geopolitical divide. Instead of thinking of China’s misfortunes as their good fortune, they may be well-served to hope China can troubleshoot its woes quickly. That includes the highly developed countries of the US, Japan, South Korea and Germany. Through the Comprehensive Economic Partnership (RCEP) pact that China has with the larger South and East Asian nations besides Australia and New Zealand, to boost mutual trade and investments, the economies of the 14 member countries have got further linked. In this context, an American columnist Bret Stephens, recently observed that “the main challenge we will face from the People’s Republic in the coming decade stems not from its rise but from its decline—something that has been obvious for years and has become undeniable in the past year with the country’s emerging woes. A poorer China will buy less of the luxury handbags from Italy, copper from Zambia, or grain from the United States. That will inevitably constrain global growth.”
We need to remain cognizant of the historical evidence that in times of distress and decline, political leaders tend to take high risks. Talking about China’s economic worries, US President Biden put it bluntly: “That’s not good, because when bad folks have problems, they do bad things.” Despite the occasional bravado shown by industrialized nations, their bilateral trade with China remains high. China is the third-largest importer of US produce ($150 billion annually), with the US in turn importing close to $500 bn worth from China. Such reliance is equally true for Germany, France, Italy in EU. Since former US President Trump imposed new trade restrictions upon China, most of which stand continued by the Biden Administration, it has also been apparent that multiple global supply chains remain dependent for critical inputs from China. This ranges from tech based products to ordinary daily-use products which the West had stopped manufacturing because of China’s cost advantages. Conversely, China has reverse dependency; not just because it needs markets for its exports, but it too imports several high technology components such as high-end semiconductors, advanced computer hardware and the equipment to manufacture these.
China’s recently growing proximity to Russia, Iran, Vietnam, and Pakistan has come in handy to mitigate some of its dependence upon the West. It has also considerably reduced its dependence for crude oil on OPEC by buying more from Russia and Iran through long-term contracts at discounted rates. For several industrial raw materials and rare metals, it has been systemically acquiring assets in resource-rich African and South American nations. China’s BRI (Belt & Road Initiative) is giving it rich dividends by developing connectivity in such regions to transport the extracted materials. Recent actions like obstructing the US’ Intel acquisition of an Israeli semiconductor company operating in China—through withholding antitrust approval—and restrictions on certain domestic semiconductor sales by US chip maker Micron Technologies showcase China’s retaliatory prowess. Earlier, by choosing to acquire multiple passenger aircraft from Europe’s Airbus instead of the US’ Boeing, China effectively conveyed its unwillingness to passively endure when confronted with tough US stances.
The US administration seems aware that China cannot be castigated beyond a point, despite its naked aggressiveness in the Indo-Pacific and the recent assertiveness to be treated as an equal on the global high table. Despite enacting laws like the Chips and Science Act to check Chinese access to critical American technology, it has sent four high-level emissaries to Beijing one after another over the last three months, with the most recent led by the US Trade Representative. Obviously, it realises the inevitable—that both sides can play the tit-for-tat game. The missions’ common objective has been to blunt possible retaliatory measures and maintain commercial ties, while conveying the US intention to not decouple from China, or hold back its economy. In the near future, one can anticipate that the US and the West’s approach to China will likely become more reconciliatory, except where security matters are concerned. China would gladly work towards a commercial détente.
Ajay Dua is a former Union Secretary of Commerce & Industry. Part 2 of this article, focusing on how India could manage its commercial interests with China, will appear in the following week.