Author: Yiping Huang, Peking University
Weak growth and rising uncertainty have focused the world’s attention on the state of China’s economy.
After a strong start to 2023, Chinese economic activity has fallen well short of expectations. Exports have collapsed. Consumption, production and investment have slowed, while inflation has declined and the unemployment rate has increased. The Chinese renminbi hit new lows in August and September 2023 on concerns about the domestic economy.
Former US Treasury Secretary Larry Summers has made ominous comparisons between China, Russia and Japan, saying that ‘people will look at some of the economic forecasts for China in 2020 the same way they looked at economic forecasts for Russia. Made for Japan in the 1960s or 1990s’.
As always, cyclical and structural factors play a role in the emerging economic outlook. Among the cyclical factors are the scars of the COVID-19 pandemic – deteriorating balance sheets, an ailing asset sector and a limited macroeconomic policy response. Meanwhile, structural pressures are weighing on confidence as regulatory, security and political stability concerns continue to grow.
After three years of pandemic pressure, the balance sheets of households, enterprises and local governments have been stretched. Unlike the United States, China’s government did not provide large subsidies to households and enterprises during the COVID-19 pandemic. Without that demand-side stimulus, Chinese consumption has been sluggish.
Economically, China’s biggest concerns revolve around the property sector. If this area collapsed, the consequences would be very damaging.
But one difference between China’s situation and, for example, the US subprime crisis of 2007–08, is the lack of visible negative equity in Chinese assets. This is due to the substantial down payment required for the purchase of a second or third property, especially in China, ranging from 60 to 90 percent. If property prices fall – and in most regions they have not yet – the contribution of the property sector to the risk of financial crisis will be less than that of the United States in a global financial crisis, although the resulting losses in terms of household property and economic The growth could still be bigger.
Fiscal and monetary responses to China’s ongoing problems, both during and after the worst stages of the COVID-19 pandemic, have been modest. This is despite China, unlike the United States and Europe, facing deflation rather than inflation risks. Since late 2020, real interest rates have remained relatively flat, even rising in several quarters when the consumer price index fell faster than the policy rate.
The lack of overall easing reflects current policy objectives. Supply-side reforms have come to dominate demand-side considerations in policy thinking.
There are also structural pressures on Chinese growth. Not least among them are regulatory actions that have seriously undermined business confidence, especially among technology companies and foreign-invested enterprises.
Some of these policies were implemented to address national security concerns, while others were attempts to deal with legitimate regulatory problems such as consumer protection and fair competition. They reflect the increasing importance the government places on security issues and the costs borne as a result.
The government has moved to address some of these negative policy impacts. As part of its broader policy mix, it has announced new policies aimed at boosting confidence and supporting private enterprise, foreign-invested firms and consumption. The government’s 31-point plan, released in July 2023, highlights the importance of the private sector and fair competition, removing barriers to entry, protecting property rights and attracting private enterprises into national projects.
But the changing geopolitical environment is impacting the economy. Both China and the United States are giving greater importance to national security concerns that affect trade and investment.
Given that both countries have similar concerns, although the definitions of political stability and national security are not the same, cooperation to deal with the challenges posed by globalization is possible. Such collaboration first requires more communication. Negotiation is valuable even – or especially – when the political situation is difficult.
Third parties can also play an important role in stabilizing relations. The EU’s approach to ‘risk reduction’, even if partial isolation by any other name, is a useful example. In Asia, regional relations can play a stabilizing role, especially with ASEAN.
Has China’s economic miracle ended? The answer is probably yes, because no miracle lasts forever. Higher incomes and the higher labor costs they generate, worsening external conditions, and an aging population all present serious long-term headwinds against high growth.
But China is neither the Soviet Union of the 1960s nor the Japan of the 1990s. For China, areas such as technology platforms, electric vehicles, green energy and electronics are now vibrant sources of innovation and development. A major financial crisis that could hit the property sector is still unlikely. The economic impact of demographic shifts will be partly countered by artificial intelligence and the digital economy.
Regulatory changes have affected some sectors, but China’s ability to average growth of more than 9 percent for 40 years suggests that some resilience remains. The recent announcement of the new policy package also shows that policymakers respond to economic challenges.
The last major decline in economic activity probably occurred in July 2023. The August data shows that the economy is slowly but surely bottoming out. Casual observation confirms that the economic recovery was underway in September.
But the fog of geopolitics is unlikely to clear any time soon. Many of the challenges facing China, such as maintaining growth while security uncertainties increase, are global. Finding ways to address these concerns within a global framework that promotes open trade and investment will be important to deal with the uncertainties ahead.
Yiping Huang is a professor and deputy dean at the National School of Development and director of the Institute of Digital Finance, Peking University.