With the arrival of the spring festival from the 28th to the 4th, China celebrated its traditional beginning of a new year on the 29th of January and reflected on several aspects of the previous year. Among them, the economic reports stood out as a sore thumb for the communist party. Several reports and indicators highlighted the economic slowdown that has been slowly and continuously eroding the nation’s finances. Although the indicators of this slowdown were there before, the COVID-19 pandemic of 2020 catalysed the process and highlighted the fault lines in the Chinese economy for the world to see.
China Economic Slowdown
The indicator of this slowdown for this fiscal year was the spending habits of the citizens in the New Year celebration. Reports indicate that the spending habits of people this year decreased dramatically. Hon-Kong Street markets saw a retail spending slump of 7.3% in contrast to the last year, despite the 1.4 million visitors to the city from mainland China. The luxury market sales are also estimated to have plunged as much as 20 per cent in 2024, the steepest since at least 2011.
Since the pandemic, the country’s growth rate stayed around 5% and in the year 2024 is at 4.6. Beijing has in recent months announced its most aggressive support measures for years in a bid to reignite an economy that had suffered on multiple fronts. A stimulus package and low-interest credits were issued to tackle the slowdown and accelerate growth, which saw some growth in the economy. However, as soon as the money was spent the growth stopped and started declining. Manufacturing activity shrank in January after three months of expansion, with the manufacturing purchasing managers’ index (PMI) falling to 49.1, the lowest since August. A PMI reading below 50 signifies a contraction in the economic activity of the sector, while a reading above 50 signals growth. Non-manufacturing gauge for construction and services dropped to 50.2 from December’s 52.2, just above the 50-mark that separates growth and contraction.
Government spending for the expansion of infrastructure and manufacturing capacity also slumped dramatically. Broad fiscal spending by central and local governments under their two main budgets, which covers everything from day-to-day expenses to infrastructure projects, has grown by only 1.5% on average each year since 2021, which is a fraction of the 11% annual growth seen in the five years prior. Several reports have highlighted the discontentment of the people through one-on-one interviews which shows the lack of financial stability amongst them from both urban and rural demographics. On top of that the above figures published by the CCP are also alleged to be fabricated for the concealment of the actual state of the economy.
Factors Behind China Economic Slowdown
Covid19 pandemic stands as a glaringly obvious factor behind the economic slowdown. It also is the trigger of this domino effect. But a deeper introspection reveals that the problems started much before that. Repeated government interference and tight hold of administration on private business is a tactic Xi Jinping’s administration is infamous for in order to assert and maintain control. Corruption and policy manipulation sowed the seed of the slowdown many years before the pandemic. However, the current persistent economic slowdown is the result of two main factors in the Chinese economy.
Ageing Labour Demography and their Productivity:
The exponential economic growth that China saw in the ’90s and ’00s was due to the abundant skilled young labourers, who propelled the manufacturing sector of the country to new heights. Lesser parental obligations and right policy decisions enabled them not only to create wealth but also to invest and spend, ultimately mobilising the economy.
However, now the conditions have changed. The same youth is now ageing the gross productivity is declining amongst that age demography. On top of that the population hasn’t yet reached the retirement stage, thus they can’t leave the workforce shortly. Studies have shown that the ageing population correlates with lower productivity and China is no exception. The new generations of skilled individuals find difficulties in job markets and are burdened with parental, grandparental and offspring obligations due to the disastrous one-child policy. All these factors contribute to reducing the spending habits which slows down the capital mobility in the economy ultimately slowing it. While the official data from CCP points to a slight fall in TFP after the 2010s, this claim remains debated as the actual figures are believed to be much bigger. Regardless, there’s widespread agreement that productivity growth has slowed significantly compared to earlier years.
Real Estate Crisis:
After the 2008 global financial crisis, the Chinese started investing their money in the real estate sector. Favouring conditions saw exponential growth in the sector and the sector became a favourite for both the creditors and investors to put the money in. However, discrepancies, bad credits, unfavourable economic trends and COVID-19 made this sector into a financial bubble. The real estate bubble burst last year with the Evergreen Crisis and pushed the whole of the Chinese banking system into abbeys. The government rescued the banks and the collateral of that is still felt by the Chinese citizens.
Other minor factors also affect the economy in more subtle ways. The Chinese economy for years has been a resource extraction-dependent economy. This was good for initial economic velocity but hampering in the long run. A 2022 study highlighted these fault lines which are, inefficiencies in capital allocation and an overreliance on a growth model driven by resource extraction. These systemic challenges, already present before the pandemic, have been worsened by the fallout from trade tensions, COVID-19 disruptions, and aggressive industrial policies implemented by the Chinese government. Adding to that the country is somewhat slow in transitioning to a high-income economy compared to the likes of Japan, South Korea and Taiwan.
Future of China Economy
The future of the economy is still in fog with mixed expectations from the experts. The reality of the situation is that the economy is still underperforming and is in constant need of stimulus from the government. The ageing population and spending habits are still the same as in the previous couple of years. Foreign investors are in constant lookout for manufacturing alternatives due to the conduct of the communist party of China. Increased geopolitical tension constantly puts the country in a trade tussle with other countries. As a result, more and more countries are safeguarding their innovation and technologies against China. With the re-election of Donald Trump, tariffs, trade wars, and economic pressure are evident for the country. India propping itself as a manufacturing alternative in sectors like defence, semiconductor chips, electronics, solar tech, EVs etc. for the world is also worrisome for the dragon.