China’s troubles may well get worse
Friday 15 Sep 2023
Lowy Institute research published last year in March already argued that China was likely headed for a sharp growth slowdown as a result of accelerating demographic decline, the limits of its over-investment model, and slowing productivity growth. Those issues relate to the supply side of China’s economy. China’s problems today however primarily reflect weak demand and the financial risks emanating from its ongoing real estate bust.
While China’s economy was previously expected to see a sharp and sustained growth slowdown by later this decade, its current economic turmoil may end up bringing this much closer.
China’s multiple economic challenges are deeply intertwined. Concerns about financial risks led China’s policymakers to trigger what has become a spiralling property market crisis, creating a large demand hole while simultaneously nullifying a key tool Beijing had previously used to stimulate itself back to growth.
At the same time, China’s weak immediate and longer-term growth outlook has made high debt more difficult to manage and the country’s demand problems more entrenched as households and businesses lack confidence to spend and invest. Moreover, the longer China’s economy remains demand depressed, the more damage this will do to China’s future growth prospects, especially as skilled young people remain out of work in their crucial early years.
Boosting consumption is the right strategy. But its ability to pull China out of its current doldrums has limits.
China’s troubles may well get worse before they get better. Growth in consumer spending is weak while China’s exports – which boomed during the pandemic – are now slowing considerably. China is also struggling to put a floor under its flailing housing market. Troubled property developer China Evergrande has filed for bankruptcy in the United States. Country Garden – a much larger developer and one until recently considered “healthy” by the government – now sits on the cusp of default. Construction activity is currently being held up by policy-supported efforts to complete existing housing projects. New housing starts by contrast are weak, suggesting a much larger contraction lies ahead unless the sector is stabilised soon.
China’s policymakers have been reluctant to return to their traditional stimulus tools of debt-fuelled property and infrastructure investment. Many argue that China’s central government should instead deliver large-scale consumption stimulus – essentially financing cash transfers to households and complementing this with other social spending measures aimed at boosting household spending and kick starting the transition to a more consumption-driven economy. Boosting consumption is the right strategy. But its ability to pull China out of its current doldrums has limits.
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