Charting a Sustainable Path for China’s Economy

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Charting a Sustainable Path for China's Economy

China’s economy is still recovering from the severe lockdowns imposed during the outbreak. And the battle for growth will go on until 2024, predicts the Conference Board’s China Center for Economics and Business. What appeared to be a demand-driven recovery in the first quarter of 2023 eventually collapsed as heavily leveraged real estate behemoths such as Country Garden and Evergrande struggled, the labor market was hampered by aging demographics and skyrocketing young unemployment, and deflation took hold across the nation. Second-quarter growth was also hindered by softer demand for Chinese products both domestically and internationally, a weakening labor market, and a decline in corporate earnings partly attributable to low inflation. On a quarter-over-quarter basis, GDP growth was 0.5%, down from 2.3%.

Slowdown in Growth

Growth continued its head-fake in the third quarter, edging up. The Confidence Board predicts that this trend will continue until year-end, but they believe it is unsustainable and will probably give way to another recession in 2024. The GDP is expected to rise by 4.1% overall in 2023, according to the Confidence Board, which is a decrease from the present projection of 5.2%. The four primary explanations for their forecast of China’s below-trend growth in 2024 which may last for years are listed below. Although consumption in China increased significantly in the third quarter, the Conference Board anticipates that this demand was fueled by pent-up demand, which will eventually decline. In a research shared with Business Insider, the economists stated, “Confidence remains weak, and there are no observable developments at the present time that might see a turnaround in sentiment.” 

Structural Issues

This year, a number of significant Chinese real estate developers have fallen behind or filed for bankruptcy, and measures by the government to stabilize the real estate market haven’t really made an impression. According to the Conference Board, “the downturn is structural and likely to be permanent.” “Chinese households no longer trust real estate to help them accumulate wealth. When the industry stabilizes, it’s difficult to say when, but it won’t be as important to growth as it was in earlier decades.” Economists believe that the housing market has not yet bottomed out, and Beijing will find it difficult to stimulate demand. China faces dire news in the form of a global economic downturn driven by recessions in the US and Europe. According to the Conference Board, demand for China’s industrial exports will remain muted throughout the new year due to the worldwide recession. “China will not be able to export a way out of the aggregate demand problem caused by its real estate downturn,” according to the experts.

External Pressures

The Conference Board believes that any major transformation or stimulus program is risky since China’s economy has long-standing fundamental problems. There is potential for policy to encourage investments and credit expansion, but the more heavily such intervention is used, the greater the likelihood that it will lead to more economic inefficiencies and speculative investments. “So far, the government has refrained from implementing a broad-based stimulus package,” according to experts. 

“However, in recent months, the government has increased its financial and policy initiatives to encourage “targeted” investment, particularly in infrastructure for disaster relief and flood recovery. Because of this, growth in 2024 is probably going to stay steady, even though the significant rebound blip observed in 2023 Q3 will decrease.” Xi has prioritized political control over the economy, broken with the collective-based decision-making of previous leaders such as President Hu Jintao, and further blurred the boundaries between the Chinese state and the governing Communist Party.

Conclusion

In conclusion, Reducing the power of the Chinese premier, who is formally the second-highest ranking official in China’s political hierarchy and whose job it has historically been to decide the direction of economic policy, was a part of that change. Another issue facing policymakers in 2024 is the enormous amounts of local government debt, which the IMF estimates to be $12.6 trillion, or 76% of GDP in 2022. 

Authorities instructed banks to extend loans to local governments with maturities in 2024 at reduced interest rates after allowing them to sell $137 billion in bonds to pay off the debt .Beijing’s credit rating was lowered by Moody’s earlier this month from stable to negative due to the country’s declining population, the real estate crisis, and the bailout of bankrupt local governments. The Financial Times claims that the rating agency warned its staff in China to stay at home before making the statement out of concern for possible reprisals. The consensus among most economic observers is that China’s economy need substantial change in order to counteract slowing down.

Research Staff

Research Staff

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