The Chinese economy, having demonstrated its prowess for the last four decades as an engine of growth and vitality for the world economy, is showing signs of slowing down to a pace comparable to other emerging economies, such as Russia and Pakistan.
Various indicators of economic growth—such as the CPI figure, a measure of inflation—have come up short in recent statistics, pointing towards a change in the economic pace that China has kept for years.
Issues such as the property crisis, rising debt levels, youth underemployment, and increasing centralization of economic activity under the government have contributed to the economic decline. “These challenges mean that China’s growth will not return to anything close to the dazzling pace of 1980-2010, when annual growth averaged close to 10 percent,” wrote Nicholas Lardy, a Senior Fellow at the Peterson Institute for International Economics.
All of these factors have resulted in a complex situation for Beijing. At this point, Chinese officials have limited options to address its depressed markets besides loosening its control over economic activity or accepting more debt.
Increasing Economic Stagnation
Chinese imports have been falling for almost a year, and exports have fallen for four consecutive months. Consumption, one of the usual drivers of economic growth, has been stagnating in China, signaling skepticism of future growth among Chinese citizens and prompting them to save.
In July, China’s economy dipped into deflationary territory with a -0.3 CPI figure, adding to the global anxiety about the direction in which its economy is heading.
Multiple economists have suggested that the situation parallels that of Japan, which lost its economic momentum at the end of the 20th century after a period of rapid growth. However, this was mostly due to households pouring savings into paying off debt—a situation that China does not find itself in.
In actuality, China’s economic stagnation has mostly been led by the property bubble bursting and the subsequent decline in real estate prices. As a result, raw material prices have decreased due to less construction, and real estate assets can no longer be relied on. “Nothing else in China’s economy has replaced the property sector as a driver of growth, which explains why economic growth has slowed so dramatically over the past two years,” wrote Logan Wright, a Senior Associate at the Center for Strategic and International Studies. Without the construction industry and property sector that China has relied on for decades, it is unlikely that another era of growth can be ignited.
A Sticky Situation
Economists have urged Beijing to inject stimulus into the ailing economy. The most Chinese policymakers have done, however, is lower interest rates and encourage consumption practices—hardly effective measures at inducing the economic growth needed to return to pre-pandemic levels.
The issue with providing substantial stimulus to China’s economy, and why officials are reluctant to do so, has to do with the vast debt that China is already drowning in. Government debt has surpassed $18 trillion, and total debt, including private enterprise, is at 300% of GDP. Chinese officials worry that pumping stimulus into the economy or increasing fiscal spending would constitute an unacceptably rapid increase in public debt.
In addition, the condensed power of Xi Jinping, the President of the People’s Republic of China and head of the Chinese Communist Party, is making it more difficult for China to address economic issues. The heavily centralized power structure prevents local government officials from promising future measures toward economic development.
Xi has instead mostly ignored the current economic situation, preferring to boast about China’s few economic positives in public settings.
Analysts believe the Chinese leadership is now prioritizing national security and control over economic growth. John Holden, a Senior Associate at the Center for Strategic and International Studies, comments that “Beijing has been on a path to recentralize power and to control behavior through anticorruption and ideological campaigns. Whether or not these approaches have achieved their political goals, they have weakened innovation and sapped entrepreneurial energy.” Amid heightening tensions between China and the U.S., Beijing prefers to consolidate power at the cost of efficient economic management and growth.
At least for right now, economic conditions have not deteriorated enough for Chinese officials to slow down their campaign of reining in private business and consolidating economic control. Perhaps that may eventually change when the costs outweigh the benefits.
This article was edited by Sarah Shanahan and Natasha Tretter.