China’s economy is facing a deepening crisis as growth forecasts continue to be downgraded, businesses shut down operations, and experts warn of further pain ahead. Despite government efforts to spur a recovery, multiple challenges persist that threaten China’s economic miracle.
Growth Plummets to Lowest Levels in Decades
China’s GDP growth slumped to just 2.9% in 2022 according to official statistics, marking the lowest expansion since 1976. Independent analysts believe real growth was likely closer to 0-2% after accounting for overstatement in official figures.
The drastic slowdown comes after decades of blistering expansion that propelled China to become the world’s second largest economy. Growth averaged nearly 10% from 1980-2010, supercharged by market reforms, an export boom, and migration of rural workers to cities.
But China’s growth miracle now faces “the end of the road” and could drop as low as zero percent warns Martin Wolf, chief economics commentator at the Financial Times.
“The drivers of China’s astonishing economic success are fading. The population is now declining and ageing rapidly. Investment has become extraordinarily high as a share of output. Returns are falling fast. Household consumption is far too low a share of GDP,” said Wolf.
Factories Shuttered Amidst “Economic Panic”
Rather than orchestrating a soft landing, conditions inside China signal an economy teetering out of control. Up to 85% of small businesses are losing money, forcing widespread closures, layoffs and defaults on loans and salaries.
“We are witnessing an economic collapse in China. Thousands of companies have closed, and millions of Chinese have lost their jobs,” said economist Zoltan Ban.
Youth joblessness has skyrocketed to an astonishing 20%, sparking fears of mass unemployment and social unrest. Highly educated graduates are taking low paying service jobs just to survive.
Rather than transitioning towards a tech and consumer driven economy, China remains stuck in an outdated growth model dependent on building infrastructure it no longer needs.
|Approaching 50% of GDP, extremely high
|Just 35% of GDP, far too low
|Shrinking due to low birth rates
|Dropped from 7% to under 1%
“The country’s labour force is on the brink of collapse while productivity growth has almost evaporated,” said analysts from Rhodium Group.
Contagion Risks Financial Crisis
The property sector lies at the heart of China’s economic woes, as years of reckless borrowing have left developers saddled with over $5 trillion in debt. Over 20 major developers have defaulted on debts in 2024 alone, sparking contagion fears.
Off-balance sheet borrowing has disguised even greater fragility in local government and SOE balance sheets. Hidden provincial debt could be upwards of $10 trillion based on analysis of bond prospectuses. This ticking debt bomb poses risks comparable to US subprime mortgages prior to 2008.
“People see now that China is facing a Minsky moment for its overleveraged property developers and local governments,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis.
Defaults could spill over into the massive shadow banking sector, which JPMorgan estimates at $9 trillion, or 15% of global GDP. While Chinese authorities have substantial resources to bail out banks, the country lacks credible institutional mechanisms like bankruptcy courts to smoothly unwind bad debts.
The sheer scale of unproductive debt now impulse weighing on growth will restrain China’s economy for years.
Policy Paralysis Amidst “Vexing Year Ahead”
Beijing remains in denial over downshifting growth prospects which dim hopes authorities can engineer a soft landing. At January’s Central Economic Work Conference, Li Keqiang reiterated unrealistic 5.5% GDP targets for 2024, despite most independent forecasts ranging from 2-4%.
China has ample fiscal and monetary space, but nerves in Zhongnanhai seem to be delaying deployment of meaningful stimulus. The PBOC has moved cautiously, cutting policy rates by just 25 basis points to support credit growth.
Fear of letting bubbles reinflate makes officials reluctant to unleash larger scale monetary or credit easing. Attempts to bail out bloated property developers have had little impact so far. Structural weaknesses in China’s economy mean traditional pump priming will become less effective.
Geopolitics presents further headwinds as decoupling threatens to disrupt China’s trade and access to crucial tech components. Covid controls and their sudden reversal damaged small businesses. Over a dozen cities have renewed lockdowns this winter, despite abandoning zero-Covid policies months earlier.
Repeated policy flip flops have created an atmosphere of uncertainty scaring away investors already skeptical of Beijing’s commitment to market oriented reforms. Promised improvements to data transparency have failed to materialize as officials seem unable to break from short term thinking.
Gray swan risks loom as tensions rise over Taiwan. “The economy will remain hostage to politics,” warned analysts from Rhodium Group, with Xi’s quest to extend his personal rule colliding with China’s unstable economic situation.
Grim Reckoning Ahead
After decades of trend-defying growth, China faces an inevitable reckoning to deal with its debt excesses and unproductive investment.
“China has not seen a single year of proper economic cleansing and consolidation since the early 1990s. The needed adjustments have been repeatedly delayed, but there’s no way around them,” said Dan Wang of Bloomberg Economics.
With traditional growth engines sputtering, Beijing has no choice but to tolerate slower growth while working down excess leverage crippling the economy.
President Xi himself warned 2023 would be a year of “extreme complexity” absent major policy course correction. Painful restructuring could spark rising bankruptcies and job losses for years.
Analysts fear if reforms are delayed again, China risks follow Japan into “lost decades” of wealth destruction and stagnation. But successfully revitalizing China’s supply side would put its economy on surer footing over the long term.
“If rebalancing finally takes off, then China has the potential to remain an engine for global growth for another generation,” wrote Martin Wolf. But until authorities cut their reliance on debt, China’s glorious miracle may fade into memory.
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