- China has failed to materialize its post-pandemic recovery and faces growing economic obstacles.
- The Chinese government faces declining trade and foreign investment, a volatile housing market and deflation.
- Experts say most of China’s problems are self-inflicted and warn policy changes are needed to boost trust.
The world’s second largest economy isn’t growing, producing or trading as much as it normally would.
The recovery from the pandemic that China and the rest of the world had anticipated has yet to materialize, with official data suggesting the economy has a long way to go to bounce back.
China’s National Bureau of Statistics said on Wednesday that consumer prices fell by an annualized 0.3% in July for the first time in two years, just above the median forecast of a 0.4% decline.
The People’s Bank of China is now facing the opposite problem of the US Federal Reserve, which has tightened policy for 18 months to keep prices from rising. Deflation — the tendency for prices to fall across the economy — points to a particularly dangerous trajectory for China, which has a huge amount of debt.
“Deflation means the real value of debt rises,” David Dollar, a senior fellow at the Brookings Institution China Center, told Insider. “We know high inflation is bad, but in the long run it helps us manage our debt burden. Deflation is the opposite.”
bloomberg Total household, corporate and government debt is estimated to be about 282% of annual economic output.
The latest figures add to already swirling unease about what growth will look like for the rest of the year, with JP Morgan strategists predicting that if policy makers don’t address the housing market and financial imbalances, China will likely hit the 1990s. He warned that there is a risk of falling into “Japanization” like the 1960s. , demographic aging.
Beijing authorities have asked experts not to portray the data unfavorably and economists to “interpret bad news positively,” according to the Financial Times.
Numbers make this difficult.
- Since the beginning of the year, China’s exports have fallen 5% year-on-year, while imports have fallen 7.6%.
- Manufacturing activity contracted for 4th straight month
- July exports fell 14.5% annually, the steepest decline in three years.
“Pre-pandemic, China was growing at around 6%, and now it is struggling to recover,” Dollar said. “Consumption from the lockdown has really not held up. Consumption, investment and net exports – the main components of GDP on the demand side – are all in serious trouble now.”
politicization of the economy
China’s US-led Western trading partners are increasingly looking elsewhere. Despite sluggish global demand for Chinese products, Russia strengthens trade with Asia during the Ukrainian war.
China’s exports to the United States fell 23.7% in June, the lowest level in six months, according to a report from the U.S. Census Bureau. $42.7 billion. This reflects both the Biden administration’s “risk aversion efforts” and a general pullback in spending as central banks around the world. raise interest rates.
The trend toward nearshoring has also increased since the pandemic. Mexico, for example, has emerged as the United States’ new largest trading partner, with US bilateral trade totaling $263 billion in the first four months of this year, overtaking China.
Dexter Roberts, author ofThe Myth of Chinese Capitalism” A senior fellow at the Atlantic Council told an insider that many of China’s problems stem from the politicization of the economy.
He said embedding Communist Party members in companies and prioritizing state-owned enterprises is undercutting domestic productivity, scaring off the private sector and making the country less attractive for foreign investment.
“Many companies now feel that China is not the market of the future,” Roberts said.
By that point, indicators of China’s overseas investment were Lowest price in 25 years in the second quarter.
unstable real estate market
Most of China’s economic problems are directly related to the real estate market.
China managed to avoid deflation in 2009 and 2012 in the immediate aftermath of the global financial crisis, but today’s housing market complicates policymakers’ ongoing battle.
Despite recent price declines, property values have risen dramatically since 2009, and fiscal stimulus may not have as much of an impact as it did in the past. China has allowed developers to overcapacity, and currently overstock is crippling the big developers.
Last week, Country Garden Holdings, once the largest developer in China by revenue, Failed to pay coupons worth millions of dollars Huge reporting expected for corporate bonds loss in the first half.
Similarly, in July, Evergrande, a Chinese developer that made headlines for its massive debt default in 2021, recorded losses of $81 billion over two years.
Real estate accounts for about one-fifth of the country’s economy, and the sector is facing headwinds from high debt and weak demand from homebuyers. According to the survey, residential transaction volume in 330 Chinese cities in June increased by 19.2% year-on-year. Research at Kitaike Research Institutethe value decreased by 23.4%.
The slump helps explain China’s sluggish Q2 GDP, which was below expectations of 6.3%.
“People are holding off on buying because house prices are going down,” Roberts said. “Much of people’s wealth is tied up in the real estate sector, so when they see it declining, they decide not to spend, but to save for the future. Without that confidence, the Chinese government We will not be able to lift the real estate sector.”
The long tail of China’s one-child policy
Even if the Chinese government manages to remedy other problems, the longstanding one-child policy may have paralyzed China’s economy for decades long ago.
In 2022, the population will decline for the first time since 1961, and consulting firm Terry Group said the country is on pace to lose nearly half its population by 2100.
But it is not just population decline that is weakening China. That is, the proportion of elderly people is rising.
In 1990, 5% of Chinese were over the age of 65. That share is currently 14% but could soar to 30% by 2050, according to Terry Group. They estimate that China could lose an average of 7 million working-age adults each year over the next decade.
Already, working-age couples have to support their aging parents, children’s education costs are skyrocketing, and confidence in the economy is low.
Experts say China needs to get rid of its long-standing hukou system in order to improve its demographics. This policy, which dates back to the 1950s, ties social welfare benefits to people’s places of origin, making rural-to-urban migration disadvantageous and difficult.
About a quarter of China’s population is engaged in agriculture, well above the US’s 3%, demonstrating China’s own productivity limits.
“I doubt they will do it, but if the Chinese government abolishes hukou, the majority of Chinese citizens, who are treated as second-class citizens, will spend more and be more confident in the future. It would mean getting started,” and improving productivity across the economy,” Roberts said.
Rocky decade ahead
China’s vast list of problems points to a difficult decade ahead.
From a volatile and debt-ridden real estate market to anti-business policies and demographic issues, Beijing has a lot to work on if it wants to match the growth of decades past.
Geopolitical hurdles over the U.S., Russia and other trading partners are creating additional headaches for President Xi Jinping, but experts say he should focus on domestic issues.
On the dollar, he expects China to grow 5% this year, in line with the Chinese government’s projections, but without financial and demographic reforms, growth could be close to 3% over the next decade. There is
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