PeaceVoice: China facing battery of economic warning signs
China’s economy has probably peaked in size and performance.
The era of investment and credit expansion seems to be over. As Bloomberg recently reported, factory output has slowed, unemployment has risen, and the stock market has reeled.
China’s share of the world economy has dropped. After peaking at 18.3% of global GDP in 2021, it slid to 16.9% in 2023, during a period when the U.S. economy was averaging 26.2% of the world total.
Several key indicators suggest China’s economic weakening is structural rather than cyclical. They include a declining workforce, youth unemployment, credit and investment drop-offs, failures in real estate and infrastructure, and the flight of multinational corporations to more accommodating locations.
All of these problems suggest the need for significant reform. But there is no sign that the leadership accepts the idea of peaking, and is thus prepared to invest heavily — economists outside China say it would take at least $1 trillion (4-6 trillion in Chinese RMB) to make a difference — in the shoring up of weak sectors like consumer spending.
Instead, China seems determined to channel its major investment into high-tech areas where it competes with the West, such as semiconductors, battery-powered vehicles and renewable energy projects.
The real estate market is “the elephant in the room,” according to a senior Chinese economist.
Real estate once comprised 30 percent of China’s GDP and a whopping 80 percent of its household wealth, as few Chinese hold investments in stock.
Demand for real estate remains strong among China’s consumers.
But outside economists say apartments in China are typically pre-sold prior to construction, and the backload has grown to the point where some 20 million pre-sold units remain unfinished. That has left prospective buyers leery of committing to large mortgages.
Buyers in one such project told CNBC earlier this year that they had been waiting for eight years now. If Chinese leaders were serious about helping consumers, they might bail out these unhappy buyers and take steps to stabilize the nation’s real estate market.
China’s central bank did respond in September by making new mortgages easier to obtain and cutting interest rates on existing mortgages. It also authorized commercial banks to lend a good deal more money to companies and households.
Whether those steps will be enough to kick-start the economy remains to be seen, however, as the Chinese have historically been savers, not spenders.
Here’s one local example of the problem:
Xinhua, China’s official news agency, reports, “Shanghai will allocate 500 million yuan from its municipal budget to issue consumption vouchers for the dining, accommodation, cinema and sports sectors.” But when you divide that amount among the city’s more than 25 million residents, it means each will get just a few dollars to spend — hardly the sort of allocation likely to propel consumption.
Youth unemployment is another serious economic problem to which China’s leadership has not adequately responded. And it comes at a time when the population is fast aging, so the workforce actually needs more bodies, in part just to have enough people paying into to the pension system to keep it viable.
The government’s recent decision to raise the retirement age will help keep the pension system afloat, but will also mean fewer jobs for young people and a longer work commitment from them to reach pension age.
For them, the pension reform is bad news. It serves as a disincentive to work and save unless the government also provides higher-quality jobs, better job security and more opportunities for women.
What’s more, unemployed young people can become a source of political protest. However, meeting their needs has proven difficult for the government.
Many observers therefore predict that the Chinese economy will continue to struggle, notwithstanding a jump in the stock market and property sales. And that promises to have ripple effect in the rest of Asia.
Bloomberg described a World Bank assessment of the problem this way:
“China’s expansion is set to drop to 4.3% next year from an estimated 4.8% in 2024, the bank said in its semi-annual economic outlook report. As a result, growth in East Asia and the Pacific — which includes countries like Indonesia, Australia and Korea — will slow to 4.4% in 2025 from about 4.8% this year.”
The bank is not convinced that the Chinese government’s various monetary stimuli will significantly jumpstart the economy. It argues China needs institute structural reform.
A Wall Street Journal report warns:
“Without more forceful stimulus directed toward boosting spending instead of expanding supply, the risk, economists say, is that China slips into a damaging period of falling prices and subdued growth similar to Japan’s decades-long stagnation, or the painful debt workouts that followed past real-estate crises in Europe and the U.S.”
China’s one bright spot came in trade, and it faces challenges there as well.
It’s widely viewed as exporting overcapacity in manufacturing, thus undercutting prices, notably in the U.S., Europe and India. Thus, we find strong resistance by German automakers to electric vehicle imports from China, and major tariff increases on Chinese goods in the U.S. and India to make local prices more competitive.
A final note: There is one class of Chinese doing just fine during the economic downturn — the superrich. Does that sound familiar?
A research organization that tracks these so-called centimillionaires — defined as people with investable wealth of $100 million or more — finds that their number has surged globally by 54% over the last decade, with the Chinese complement making the biggest gains.
About the writer: Mel Gurtov is a professor emeritus of political science at Portland State University. His work is syndicated through PeaceVoice.
Comments