China’s Sinking Economy: Can the Country Bounce back?

China’s economic progress since the commencement of its reform period has given inspiration to the other developing countries that if a communist country like China can do it, so can we. However, the growth numbers have come under severe scrutiny. Economists claim that China has been cooking its numbers and has exaggerated the economic output which is proven by the ongoing liquidity crisis. The Asian giant is losing its luster seen in an IMF forecast done two months ago revising the expansion rate between 7-8 percent admitting to numerous unknown risks. It is predicted that China would observe an average growth of around 3.5 percent in the next 10 years.

The leadership of China is well versed in the economic challenges faced by the country. The majority of the countries in this region have adopted the 'Asian Development Model' which later turned out to be very problematic [1]. There are several common dangers experienced by these countries such as widespread corruption, extreme levels of inequality, excess debts, cheap loans provided to few favorable companies by the state-regulated banks, currency undervaluation to increase exports, reckless investments undermining productivity, crashing of real estate due to depressed interest rates and many more.

The Burst of Economic Bubble  

The real estate sector in China is a dominant investment absorber because there is no property tax charged; however, the real estate arena is down with heavy debts at present and could have a trickle-down effect over the entire Chinese financial system. It accounts for 29 percent of the GDP and 70 percent of the wealth of people is in this sector. In the latest financial stability report, the United States Federal Reserve expresses concerns related to potential global financial risks due to sudden shifts in the Chinese real estate sector particularly the ramification of the Evergrande fall out [2]. Evergrande is one of the biggest real estate companies based in China going through a sorry state. The property sector giant has around 300 billion USD as liabilities. The investors await 148 million USD as overdue payment, however, Evergrande is stumbling between deadlines. In the past months, China observed a surge in real estate prices making it tough for people to afford housing.

China is undergoing a huge systemic problem; Economists have expressed their concerns that almost two-thirds of all the real estate developers in China are in a danger zone wherein they fail to pay back their debts [3]. The government announced a halt in lending to the real estate companies to bring down the prices. Now the only solution left for Evergrande is to start selling off its assets. Therefore, Beijing is prodding the government-owned companies and state-regulated real estate developers to purchase Evergrande's underlying assets to control the sudden fall which could affect other sectors. On the other hand, the government has refused to bail out Evergrande which manifests that Beijing is not worried that it would in any manner paralyze the economy of China. No wonder President Xi Jinping is so composed during his conferences because the economic bubble which is gradually bursting in China is created by the government itself to improve the unbalanced and inadequate living standards.

Social Unrest due to Depression in Real Estate

In China, the real estate sector is the most popular sector amongst people. Unlike Western markets the Chinese stock market is not as developed yet, hence, people prefer to invest in housing. However, the returns from real estate do not live up to the expectations like in the global stock markets. Therefore, a gloomy situation of bankruptcy in real estate companies results in an extreme level of unemployment, deposit losses, and wealth losses.

China’s economy was already going through hardships due to weak consumer spending after the outbreak of the COVID- 19 virus. Several businesses were forced to shut their operations because of stringent lockdown measures. Before the economy could recover, the contraction in real estate followed by paucity in energy supplies stimulated the most spectacular economic slowdown since the 1990s.

A Shift in the Economic Structure

Beijing for the past year has been introducing new regulations for the digital and communication sectors. Henceforth, undermining the liberty of the country’s domestic technology platforms such as Alibaba, Tencent and Baidu, and others. The government's regulatory frenzy is an attempt to keep a check on domestic data and preserve advanced data security conditions. With increased government interference, these conglomerates are drifting away from the market power they upheld until now.

The country’s leadership has proposed a major shift in the economic policy from 'growth at all costs’ to 'common prosperity' vocalized by President Xi Jinping [4]. Experts suggest that the concept of common prosperity endorsed by the state is to walk towards a more equal society by transforming the existing market economy into somewhat a state-planned economic structure. This is an attempt to uplift 600 million people from the poor category into the middle class. Everyone is expected to be part of a shared wealth of the country. However, the change is seen as problematic because the responsibility of providing a basic standard of living is in the hand of the state and not private companies.

China is stepping into a phase of nationalizing and restructuring the economy. President Xi is embracing a once in two decades economic overhaul akin to the market reforms brought by Deng Xiaoping in the 1970s and the 1990s transformations by Zhu Rongji [5]. All the assets or companies that are on verge of a meltdown are going to be subdued in one or the other state-owned enterprises (SOEs) which will be invisible to the naked eyes or what Adam Smith would have endorsed as, ‘Beijing’s invisible hand’. The government is ready to take harsh measures to avoid any kind of social unrest looming due to the current economic crisis.

For some time now, China has been projecting an inclination towards domestic growth rather than exports. The government has introduced curbs in sectors like the tech market, out-of-school education, and overseas stock market listings. President Xi's idea of 'zero- COVID policy' has given China a golden ticket to steer the economy away from globalization to a more protectionist stance. The 'Dual Circulation' strategy has worked well in favor of China which aims at economic self-reliance, opening up domestic markets for the global audience, and creating third markets under the 'One belt- One road initiative' [6]. To sum up, China plans to restrain the private sector and foreign investors for now, and once its domestic growth balances, the world will encounter China jumping back to square one.

Alarming Energy Crisis

China is going through a severe electricity shortage and energy crisis of this century. In the southern province of Guangdong, more than a hundred thousand factories had to shut their operations temporarily [7]. China’s electricity shutdown is threatening the world’s supply- chains. The manufacturing sector is one of the key pillars supporting the economy which is now downgraded due to the deepening energy crisis. However, the impact of this shock needs to be thoroughly assessed before any firm conclusion.

The Chinese economy is highly dependent on fossil fuels for its energy generation similar to the condition of India. Over the past years, coal dependency has increased GHG emissions to an extreme level leading to massive air pollution. Although the country has pledged to achieve a carbon-neutral economy until 2060 but it would be overshadowing the business growth and the manufacturing abilities. Due to the strict implementation of climate control protocols, there is a visible slowdown in industrial output. Power rationing in the past few months and a sudden surge in the price of raw materials are worsening the struggles for the second-largest economy of the world.  

Conclusion

There are favorable assumptions that China’s dampen economic growth would have an adverse effect on the global economy. Although, it is hard to believe that this will end in another 2008 global financial crisis. Back then the United States was in a far worse situation compared to China now. The real estate sector tumbled completely, however; it is not the same for China because more than 90 percent of the people own their houses as opposed to just 60 percent in the United States. On the other hand, China's economic crisis did not arise due to stock exchange crashes or trouble with financial investors like the Lehman Brothers. Also, the Beijing government and state-owned enterprises are managing the crisis which was not the case in the United States. China can be seen as a standalone example because the crisis is not an ambush or a surprise to the government, it was expected to occur over the past decade. The leadership was aware that the country has accumulated a debt of around 100 percentage points relative to its GDP since the global financial crisis. Henceforth, Beijing promises smooth economic growth and avoids any likelihood of a financial crisis. The country has learned from the mistakes of the previous financial crisis in the United States as well as the 1990s financial meltdown in Japan. The world should not underestimate the capability of Beijing to draw policies that keep the economy moving onwards.

References:

[1] https://www.reuters.com/breakingviews/chancellor-chinas-economic-miracle-is-ending-2021-11-11/

[2] https://www.youtube.com/watch?v=eV_9eWR19do&ab_channel=DWNews

[3] https://www.youtube.com/watch?v=1T6IE0PpXOw&ab_channel=PascalCoppes

[4] https://economictimes.indiatimes.com/news/international/business/chinas-slowdown-raises-questions-for-global-economy/articleshow/87622774.cms

[5] https://theprint.in/world/investors-know-chinas-economy-is-slowing-down-but-they-dont-know-how-bad-it-is/755846/

[6] https://www.bruegel.org/2021/09/what-is-behind-chinas-dual-circulation-strategy/

[7] https://www.youtube.com/watch?v=YQRCmRTcuJo&ab_channel=DWNews

Pic Courtesy:-Natalya Letunova at unsplash.com

(The views expressed are those of the author and do not represent views of CESCUBE.)