China has the second-largest economy in the world with a GDP estimated at 18.5 trillion USD. However, since the start of the second decade of the 21st century, World is witnessing China economic slowdown, hit by crisis after crisis. As several international entities have invested their interests and assets in the country, an economic collapse even a minor one could set the world economy into the realm of instability. In this exclusive, let us understand China’s plummeting economy and its impact on the world.
From the opening of its economy in 1978 to 2009, China saw an average of 10.5% growth. After that, especially in the starting era of Xi Jinping, the current president of the ruling party CCP, the figure came down to almost 6.7% average till 2021, except during pandemic year. However, since then the growth has been 5% at stretch and is expected to reduce to 4% by the end of 2024. The IMF (International Monetary Fund) in December of last year regraded the Chinese economy as a “drag” on the world.
The situation is so bad that the country’s stock market saw a massive sale of Chinese assets by foreign investors, that wiped out 2 trillion USD in the stock values. However, the sale was bullishly stopped by CCP authorities, making the investors warier of the country and eager to leave. Despite the government stopping the sale, the benchmark MSCI China stock index is now down more than 60 per cent from its peak of early 2021, reflecting a loss of more than $1.9tn in market capitalisation.
What are the Factors Behind China Economic Slowdown?
Government Interference
The domino effect of this blunder started way back in the early 2010s when the current administration took over the country. The exponential growth of China is the direct consequence of its open market policies that were adopted in 1978. However, in Xi’s era, the government started interfering in private business and business interests for its agenda. Over time the government started acquiring a small portion of prominent businesses. By 2018, the government made these stakes a requirement for any company to be listed on domestic stock exchanges. By the start of the second decade, authorities became more explicit in this regard as prominent party members assumed crucial positions in several private businesses all for the interest of the party. Companies that failed to comply were put under massive scrutiny. Jack Ma and Alibaba’s financial branch Ant Group is a stark example of that.
As a result of this, corruption and favouritism were rampant. Economic decisions and tax benefits were allotted to serve certain groups of businesses. This led to entrepreneurial discouragement and a decline in fair business practices, which in turn affected the economy for the worse.
Covid and Covid policies
The coronavirus pandemic hampered the Chinese economy both for the short term and long term. 2020 alone saw a 6.8% contraction in the economy. Adding to that loss of countless lives shook the country. In this time of turmoil, China’s harsh and borderline inhumane Zero COVID policy affected the economy and daily life of the people for the worse. Retail was at 11% lower year-on-year, while housing sales—comprising over a fifth of GDP—plummeted 47% over the same period. Scenes from early May of workers fighting with public health officials at a factory producing Apple MacBooks in Shanghai were the reflection of the manufacturing sector. There the workers were refused permission to leave their workplace to rest at on-site dormitories spotlighting the mounting friction between economic priorities and public health. This resulted in nationwide protests and a manufacturing decline as a result.
Ageing Population and Youth Unemployment
The urban unemployment rate for the age group between 16-24 has reached 20.4% in April 2023, nearly double the pre-pandemic level of about 10% in April 2019. Mismatched skills, supply chain dynamics and the COVID-19 pandemic are the major contributors to this rise. Apart from that China’s one-child policy, which was implemented in the late 1970s, led to a decline in the total fertility rate below the replacement rate affecting the country’s economy massively.
Over the past three decades, China has witnessed an increasing proportion of older populations, which exerts pressure on economic growth and raises concerns about the sustainability of its remarkable economic performance. As the population ages, the labour force shrinks, leading to a reduction in available workers affecting production and overall economic output. The ageing population also places strain on pension systems and public finances. Providing adequate support for retirees becomes more challenging. Consumption Patterns and healthcare Costs also puts strain on individual finances as well as the country’s economy.
Housing Crisis in China
The current Chinese housing crisis is more of a result of these factors and a trigger for the economic meltdown, baring the inefficiencies in the economy. A common way to buy property in China is where properties are sold before they are built and property developers rely heavily on borrowing to finance their projects. Buyers deposit money in an account before the property is built, and developers are not supposed to have access to all of the money until they have hit certain pre-agreed milestones during the building process. However, buyers have complained that many banks have been providing loans to developers before the required stage of work has been reached. They also believe that loose regulation of funds has provided some developers with both the temptation and ability to keep investing in new projects, by borrowing more before current projects are completed. As a result, a huge amount of debt has accumulated in the market over the past two decades. The COVID pandemic slowed spending habits and restricted the rigorous public investment in housing. Thus, more than 300 groups of homeowners refused to pay between US$150 billion and US$370 billion in home loans, forcing the government to step in and put regulations. The regulations and the mortgage strikes among home buyers panicked the ecosystem and triggered the collapse as everyone from investors to buyers started pulling their money from financial sectors. Evergreen Group, China’s biggest real-estate company’s collapse brought this issue into the limelight and to this day the housing market hasn’t recovered from this crisis.
China Economic Slowdown Effects on the World
China to this day is one of the major manufacturing hub of the world in various sectors despite numerous companies moving out to other countries. Several countries have invested vast amounts of money in the span of decades. The crisis is standing on the brink of collapsing the manufacturing industry along with the raw material supply chain. Several African nations stand to bear the weight of China’s economic failure, as Africa exports various raw materials to the country.
Apart from that the credibility of the Chinese currency depletes affecting the entities trading in the Yuan. Several countries that are receivers of Chinese loans are fearing loan recalls which they may not be able to pay back. Infrastructure projects both domestic and international are either halted or closed. The ambitious Belt and Road Initiative is a prime example of this, as the project is nearly dead.
China Economic Slowdown Impact on India
International players both government and private are however starting to adapt solutions and alternatives to these crises. USA and Europe, the major importers of Chinese goods and services are looking to diversify and minimise their footprint in China. Companies like Apple and Foxconn are setting up plants in India to tackle their China dependency. Meanwhile, China hasn’t yet implemented any long-term policy change, but short-term crisis aversion. With several factors in play and not-so-promising predictions, it is yet to be seen how the Dragon will tackle this predicament.