The Red Dragon: has it lost its flame?

Over the past few decades, China’s economy has grown at rates unprecedented to our time. Boasting a 30-year-average annual growth rate of 10%, the ‘workshop of the world’ is now one of the largest and most powerful economic forces around. In fact, with China predicted to overtake the US as the world’s largest economy by 2035, until recently it may have seemed unstoppable. However, after a disastrous performance in 2022, cracks in the economy are becoming all the more obvious. With China at the forefront of the global markets, there is one question in need of an answer: is China’s economy in trouble?

In 2022, China’s GDP expanded at its slowest pace in half a century: coming in at 3%, economic growth was a far cry away from the Government’s target of 5.5%. Due to China’s pivotal position on the world stage, the possible implications of this have raised alarm bells not just within the nation itself, but on an international scale. The global economy has grown to rely on China, both in terms of its supply and its demand: while China and its fruitful supply of workers is the key provider of manufactured goods for most countries, others- such as Australia- are dependent on its overwhelming demand for natural resources such as iron ore and coal. Therefore, it is no wonder that China’s recent economic struggles have been thrown into the financial limelight, as economists recognise the critical need to rethink whether China’s future is really as bright as its forecast.

Some critics have argued that evidence for China’s economic woes has been mounting since long before its disappointing growth this year. Indeed, productivity growth has been stagnating for a substantial time: while the early 2000s saw an average growth rate of 2.7%, this number has shrunk to only 1.3% across the 10 years up to 2019. This discovery highlights the growing consensus from economists that China’s current situation may not be a one-off, but instead an exposé of serious underlying issues that are systemic to China’s economy.

Indeed, China certainly has some economic problems that are more deep-rooted than others. Alongside China’s abysmal growth rate this year, the country also saw its population fall for the first time since 1961, marking the beginning of what is expected to be a long period of population decline as its population ages. Economists have commented that this poses a major future obstacle to China: as its workforce contracts, an exodus of foreign direct investment and exports is likely to follow.

Andrew Harris, deputy chief economist at Fathom Consulting in London, summarises the damning implication that this holds for China, stating that it is  ‘going to get old before it gets rich’. However, while there is an air of uncertainty surrounding how severe the consequences of this issue may be, there is large scale agreement that this year’s performance was an exception to the rules.

For a large part of the last three years, China’s economy has stifled under strict Covid-19 restrictions set in place by the Government. Indeed, it wasn’t until last month that China abandoned its Zero-Covid strategy, where rolling lockdowns and mass testing remained in place despite conditions returning to normal across much of the rest of the world. Alongside knocking a huge dent into consumer spending, the policy also essentially cut off China globally, inhibiting export and investment revenue.

While the removal of the strategy may therefore have come as a relief to the financial world, in the short term it may have made matters worse. Announced with little warning and without preparations for vaccinations or medical measures, the virus spread into all corners of the economy, leaving millions too ill to work and causing further disruption to supply chains. While the infection rate is now reported to be stabilising across the nation, efforts to stabilise the economy in a similar manner after 3 years of turmoil may be much harder to achieve.

Severe problems have also arisen in China’s real estate, a market that has been a key driver for the nation’s growth since the 2000s. Suffering a decrease in sales of 28.4% in November alone, the staggering downturn in the housing market poses a serious threat to China’s transition into a ‘middle-income’ country as the sharp decline in house prices erodes the blossoming wealth of Chinese families. As these unique issues continue to blur the extent to which China’s economy is in actual trouble, attention has turned to the plans China has set for its economic revival.

Indeed, China itself seems to think that the pandemic and housing market downturn have catalysed its economic issues to appear far worse than they are in the long-run: at the World Economic Forum in Davos earlier this month, China representatives singled out real estate and consumer spending as the two key areas of focus, announcing that resolving the risks in these areas are a ‘top priority’ for getting the economy back on track.

Plans to ease regulation in the property sector and re-embrace the free market and private capital have led many to bet on an optimistic near-future for China as it re-emerges into global trade, with its predicted growth rate for 2023 standing at a much stronger 5.5%. Alongside these pro-growth policies, China is also hopeful for a phenomenal spending spree from its domestic consumers. This very well may happen: Andy Rothman, an investment strategist at the Matthews Asia fund, has noted that a huge pool of household savings was accumulated during Covid-19, as bank balances were up 42% since 2020.

As some anticipate a ‘banner year of growth’ within the Chinese stock market, it appears that the nation is set to make a strong comeback from the short-term economic issues it is facing, and there is no doubt that the financial world is eagerly awaiting its return. However, there are still critics that are sceptical of the extent to which China will discard its government stronghold on the economy to embrace the free market and private capital.

As the One-Child Policy has already shown through its creation of China’s population predicament, an over-involved Government may hamper an economy more than it aids it, causing chronic dependence on government stimuli and inefficiency within state-run institutions. If China continues to engage in these practices, its economic growth is likely to be unsustainable in the long run. But as Mark Williams from Capital Economics states, ‘Xi’s desire to make sure that the Party’s control extends across society runs far deeper than his commitment to growing a market economy’. Thus, while China may be out of the woods for now, a less promising future may await.

Image: Zhang Kaiyv on Pexels

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