China’s Economy Is in Big Trouble

China's Economy Is in Big Trouble

Over the last four decades, China’s Economy has maintained an average annual growth rate of around 10%.

However, at present, China’s Economy is struggling with a decline in trade and foreign investment, an unstable housing market, and deflation. The world’s second-largest economy is not growing, producing, or trading as much as usual.

Annual GDP growth has experienced a relative decline since 2010, except for a substantial rebound following the pandemic. Years of infrastructure investment have left local governments grappling with overwhelming debt. China’s economy came to a standstill due to nearly three years of zero-COVID strategies. Youth unemployment is rapidly rising, reaching record levels, with expectations of further increases.

At the same time, President Xi Jinping is steering China away from the pro-investment approaches of his predecessors, emphasizing ideological and national security concerns. The public support for China’s Communist Party is revealing fractures, particularly among residents in affluent cities who bore the brunt of the harsh zero-COVID measures.

China’s National Bureau of Statistics revealed a significant annual decline in consumer prices for July, marking the first such drop in two years, with a decrease of 0.3%. This result slightly surpassed the median estimates which projected a 0.4% decrease.

The Economy of China Is in Big Trouble Consumer Price Index

In an intriguing reversal of positions, the People’s Bank of China is now grappling with the opposite dilemma faced by the Federal Reserve. While the Fed has spent the past 18 months tightening policies to rein in surging prices, China is confronting the threat of deflation—where prices throughout the economy steadily decline. This trajectory poses a particularly perilous challenge for China due to its substantial debt burden.

China's economy  The Economy of China Is in Big Trouble Monthly Inflation in China
China’s Economy – Monthly Inflation in China

The most recent data further fuels existing concerns about the growth outlook for the remainder of the year. JPMorgan strategists have sounded a warning, stating that China risks experiencing a “Japanification” akin to the 1990s if policymakers fail to address issues within the housing market, financial imbalances, and the aging demographics.

In the year-to-date, China’s exports have dropped by 5% compared to the previous year, while imports have seen a sharper decline of 7.6%. Manufacturing activity has endured four consecutive months of contraction, with July’s exports experiencing the steepest annual decline in three years, plummeting by 14.5%.

China’s Western trade partners, led by the US, have increasingly sought alternative avenues. Global demand for Chinese goods has cooled, even as Russia strengthens its trade relationships in Asia amidst the ongoing conflict in Ukraine.

Trouble in China’s Economy: FDI Drops to Lowest Level Since 1998

The New foreign investment in China fell to a 25-year low in the second quarter, raising concerns about how much geopolitical tensions and a slow economic recovery could damage business confidence. Foreign direct investment liabilities, a measure of foreign direct investment in China, fell to just $4.9 billion in April-June, according to data released by the Foreign Exchange Administration on Friday. That was down 87 percent from the same period last year and was the lowest amount for any quarter since 1998.

China's Economy - FDI in China drops to lowest level since 1998
China’s Economy – FDI in China drops to lowest level since 1998

Troubles in China’s Economy: Another Major Real Estate Developer Faces Risk of Default

China’s vast real estate sector has long been a key growth engine of the world’s second-largest economy, accounting for up to 30 percent of the country’s GDP. But many major developers have run up huge debts, typical of Evergrande’s collapse two years ago, which was followed by a wave of industry-wide defaults.

The latest major player to run into trouble is Country Garden, once China’s biggest developer. Country Garden Holdings missed US$22.5 million in payments on two bonds and the staggering losses reported by Evergrande in July have further underscored the sector’s woes. Shares of the Country Garden have fallen 16% in Hong Kong since Tuesday after Reuters and Chinese media reported that interest had not been paid on two US dollar bonds. Trading in many of Country Garden’s yuan-denominated bonds was halted in Shanghai and Shenzhen on Tuesday as they fell more than 20 percent.

Evergrande Group, the world’s most indebted property posted a combined loss of $81 billion in 2021 and 2022 and a rise in total liabilities in its long overdue results.

China's economy  Mortgage Lending
China’s Economy: Mortgage Lending is Declining is China

The core of China’s economy revolves around its property market. Although China managed to avert deflation in the aftermath of the global financial crisis in 2009 and 2012, the current state of the housing market adds complexity to the ongoing struggle faced by policymakers.

Despite recent price declines, property values have risen significantly since 2009. The effectiveness of fiscal stimulus measures might not match previous impacts. China’s allowance for excessive property development has resulted in an inventory glut that has severely affected major developers.

Home transaction volumes across 330 cities in China witnessed a drastic year-over-year decline of 19.2% in June, according to the Beike Research Institute. Property values have also plummeted by 23.4%. The downturn in the real estate market helps elucidate China’s lackluster second-quarter GDP growth, which fell below expectations at 6.3%.

Even if Beijing were to address its other challenges, the impact of decades of the one-child policy would still cast a shadow on its economy. In 2022, China’s population shrank for the first time since 1961. The Terry Group, a consulting firm, projects that China could lose nearly half of its population by 2100. Furthermore, the increasing proportion of elderly citizens—rising from 5% in 1990 to 14% presently and potentially reaching 30% by 2050—presents significant demographic challenges.

To add to these complexities, the one-child policy has led to the burden of supporting aging parents falling on working-age couples. Rising education costs for children and waning economic confidence further compound the challenges. Experts posit that Beijing must dismantle its longstanding household registration system to improve demographic conditions. This policy, originating in the 1950s, has made rural-to-urban migration unfavorable by tying social welfare benefits to the birthplace.

Approximately a quarter of China’s population is employed in agriculture, a much higher percentage than the mere 3% in the US. This dynamic imposes productivity constraints. From an unstable and debt-ridden property market to policies unfavorable to businesses and intricate demographic concerns, China’s plate is full as it strives to attain the growth levels of the past decades. Geopolitical hurdles with the US, Russia, and other trade partners present additional challenges for President Xi Jinping. Nevertheless, experts assert that focusing on domestic matters should be the top priority.

Rising Youth Unemployment in China Amidst Stumbling Economic Recovery

Amidst a stumbling post-pandemic recovery in China, the issue of youth unemployment has reached an unprecedented level. Official data reveals that the unemployment rate for individuals aged 16 to 24 in urban areas surged to 21.3% in the previous month. Economists are closely monitoring the situation as a significant 11.58 million university graduates are projected to enter the Chinese job market this year.

Youth Unemployment Rate Hits High in China

The upward trajectory of urban youth unemployment has persisted over several months, primarily attributed to factors such as a mismatch between graduates’ skill sets and the currently available job opportunities.

Officials have acknowledged the likelihood of continued growth in youth unemployment over the next few months, with expectations of a peak around August. Notably, starting this month, the National Bureau of Statistics has opted to discontinue the release of unemployment data specific to age groups, citing the intention to “enhance and refine labor force survey statistics.”

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