China’s Recent Economic Woes Suggest There is Something Seriously Amiss

by | August 14, 2023

Originally published in The Guardian | Aug 11th, 2023

At a Politburo meeting last month, China’s leaders referred to the economic recovery this year as “torturous”. You won’t often hear such candor coming from a Chinese Communist party institution, let alone such an elevated body. They were referring to current conditions, of course, but China’s problems reveal much that is systemically out of kilter in its economic and political system.

During the past few days, some of the statistics China has published have caused a stir. Consumer prices in July were lower than a year ago, suggesting it might be on the cusp of deflation, which reflects a chronic shortage of demand in the economy. And China’s foreign trade in the same month showed a sharp fall in exports due to weak global demand, with a sharper decline in imports signifying weakness in demand at home. There were murky factors affecting both, but the message is that something more serious is amiss in China.

Indeed, China was widely expected to bounce back from the pandemic and there was a bit of a flurry early in 2023. Yet, consumption has generally been very subdued especially for big-ticket items such as cars and houses, and private investment, the backbone of China’s economy, fell in the first half of this year, for the first time since such data was published many years ago.

Private firms and entrepreneurs are not spending much on investment or on hiring people. Youth unemployment has topped 21%, or double what it is in the UK and almost three times the rate in the US. The annual graduation of 11-12 million students in the summer is aggravating an already difficult situation because of the problems of finding suitable work, and also because the Chinese labor market has become one in which most jobs are in the lower-pay, low-skill, gig or informal economy compared with higher quality jobs in manufacturing and construction.

It would be wrong though to pin this all on the pandemic. Most things weighing on China’s economy have been building for several years, even while much of the world was wowed by China’s global brands such as Huawei, Alibaba, Tencent and TikTok, property was booming, and China was leaving its footprint all over the world through the “belt and road” initiative and its rising governance engagement with global entities such as the International Monetary Fund and the World Health Organization.

In spite of its unequivocal accomplishments and successes, China has, during the past decade or more, spawned a mountain of bad debt, unprofitable and uncommercial infrastructure and real estate, empty apartment blocks and little-used apartments and transport facilities, and excess capacity in, for example, coal, steel, solar panels and electric vehicles. Productivity growth has stalled, and China can unfortunately boast one of the world’s highest levels of inequality.

It is ageing faster than any other country on the planet but with a skinny social security system in which most of its 290 million migrant workers are not eligible for most social benefits. Under Xi Jinping, moreover, it has also developed an increasingly repressive, state-centric and controlling governance system, both for political reasons and to deal with the effects of its failing development model.

These are testing times for Chinese citizens, especially the fabled rising middle class whose savings have mostly found a home in an outsized real estate sector which has now entered a period of structural decline. Most of the housing stock, overbuilding, collapse in transactions and weakness in prices are not in big agglomerations such as Beijing, Shenzhen, and Shanghai, but in hundreds of smaller cities and towns that rarely make news.

China’s leaders have been vocal this year about strengthening consumption and about improving the business environment for private firms and entrepreneurs, who have been pressured or punished to align their commercial interest with the party’s political goals. We still await evidence that such rhetoric has substance.

In the coming weeks and months, we should probably expect the authorities to ease financial and budgetary policies, housing regulations, and borrowing caps to finance infrastructure. There might even be measures that look consumer-friendly but also fail to boost the income that alone can sustain higher consumption.

These things may give the economy a temporary lift over the winter but the underlying weakness of the economy and the greater authoritarianism that China features are now two sides of the same coin that seem irreversible, certainly for the time being.

It is a moot point whether this sort of China in the 2020s is a bigger threat to geopolitical stability than one in which it confidently strides the world stage and is able to brush aside liberal leaning democracies and reframe global governance in its interests. But a crucial one to get right.

George Magnus is a research associate at Oxford University’s China Centre and at Soas, and author of Red Flags: Why Xi’s China is in Jeopardy

This article first appeared in The Guardian on August 11, 2023

Filed Under: Economics . Featured

About the Author

George Magnus is an independent economist and commentator, and Research  Associate at the China Centre, Oxford University, and at the School of Oriental and African Studies, London. George was the Chief Economist, and then Senior Economic Adviser at UBS Investment Bank from 1995-2012. He had a front row seat and key managerial position for multiple episodes of boom and bust in both advanced economies and emerging markets, including notably the Great Financial Crisis of 2008. George famously anticipated it in 2006-2007 with a series of research papers in which he warned of an impending Minsky Moment. Whilst at UBS, he served for four years as the Chair of the Investment Committee of the pension and life assurance fund. For four years until 2016, he served finally as an external senior adviser with clients of the investment bank. He had previously worked as the Chief Economist at SG Warburg (1987-1995), and before that in a senior capacity before ‘Big Bang’ at Laurie Milbank/Chase Securities, and before that, Bank of America in London and San Francisco. George is closely followed nowadays for his insights and observations about the global economy in general, and China and demographics, in particular. His China focus derives from a long period of observation and study that goes back to his first visit in 1994. He also opines regularly on demographic trends around the world, as well as on key issues nowadays such as Brexit, and the US and world economy. He is a regular contributor to the Financial Times, Prospect Magazine, BBC TV and radio, Bloomberg TV and other outlets. His written work and a blog can be found on his website at George’s current book, Red Flags: why Xi’s China is in Jeopardy was published in September 2018 by Yale University Press. It examines China’s contemporary economic and commercial challenges and aspirations to modernity in the light of a governance system that is a throwback to much earlier times in the People’s Republic.  His earlier books are The Age of Aging (2008), which investigated the effects of the unique experience of demographic change on the global economy; and Uprising: will emerging markets shape or shake the world economy? (2011)which examined the rise of China and other major emerging markets, and questioned controversially the widely accepted narrative that China was destined to rule the world.

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