For the first time since 2008, and excluding the Covid-19 pandemic, China stands on the precipice of a recession. New economic data reveals a troubling decline in manufacturing, which contracted for the fourth consecutive month. This significant slowdown in China’s industrial sector, particularly marked by the collapse in new orders, signals a deeper economic malaise. In essence, what China faces is not just a gradual downturn, but a stark, cliff-like drop in output once existing backlogs of orders run out.
China’s manufacturing sector forms a critical pillar of its economy, accounting for about a third of its GDP. This is far more significant than in Western economies like the United States, where manufacturing plays a smaller role. The slowdown in this sector could have profound consequences, both domestically and globally. Compounding the problem, the simultaneous collapse of China’s once-booming property sector, which also represents roughly a third of the economy, is fueling an economic crisis that Beijing appears increasingly unable to contain.
Manufacturing Slump: The Backbone of China’s Economy Wobbles
The latest data on Chinese manufacturing underscores the precarious state of the nation’s industrial base. Manufacturing activity has shrunk for four straight months, driven largely by weak demand. New orders, a key indicator of future production, have plummeted. The backlog of orders that once kept factories running is rapidly dwindling. The implications of this are stark: when these backlogs dry up, factories could face sharp production cuts or closures, potentially triggering a wave of layoffs.
Manufacturing has long been the backbone of China’s rapid economic rise. The country became the “factory of the world,” producing everything from cheap consumer goods to advanced electronics, helping lift hundreds of millions out of poverty and creating a burgeoning middle class. But now, with factories slowing down, the prospects for continued growth look dim.
Worse still, China’s manufacturing woes are not contained within its borders. As the largest exporter in the world, a slowdown in Chinese production could reverberate through global supply chains, affecting industries from electronics to automobiles.
Property Market Collapse: Adding Fuel to the Fire
Compounding the manufacturing crisis is the collapse of China’s property market. For years, real estate development was a key driver of China’s explosive economic growth. Cities like Shenzhen and Shanghai witnessed rapid urbanization, with soaring housing demand and astronomical property prices. However, a severe downturn in the property sector is now underway, dragging the broader economy down with it.
London’s Financial Times reports that office buildings in China are now emptier than during the Covid lockdowns. Notably, this isn’t driven by the remote work phenomenon that took off in other countries. Instead, the vacancies are a result of mass layoffs, signaling a deeper malaise in the labor market. In Shanghai, office vacancies have reached a staggering 21%, while in Shenzhen, China’s central export hub, the vacancy rate stands at an even more alarming 27%—both figures far surpass the vacancy rates during the pandemic.
To give a sense of the scale, rents in Shenzhen have collapsed by 15% year-on-year. The empty office spaces paint a grim picture of China’s economic slowdown, and with the property market accounting for such a significant portion of the country’s GDP, the ripple effects are vast. Homebuyers who invested their life savings into apartments that remain half-built as developers collapse are left with nothing. This destruction of wealth could have profound long-term consequences on consumer spending, further dragging down economic growth.
GDP Illusion: Official Figures Belie the Reality
Despite the visible signs of economic distress, China’s official GDP numbers remain curiously robust. The Chinese government continues to report steady growth, but there is widespread skepticism both domestically and internationally regarding the accuracy of these figures. Many economists believe that China’s real GDP growth is significantly lower than what is reported, pointing to contradictory data such as the contraction in manufacturing, skyrocketing youth unemployment, and the plummeting property market.
Even in China, trust in official economic data is eroding. As Beijing prioritizes political stability and control under President Xi Jinping’s increasingly authoritarian rule, the reliability of economic statistics is called into question. For now, the government maintains the facade of economic health, but this illusion is becoming harder to sustain as the crisis deepens.
Foreign Investment Flees China
In addition to domestic challenges, foreign investment in China has plunged by a third over the past year. This steep decline is largely attributed to President Xi’s authoritarian policies, which have driven away foreign firms that once saw China as a key market and production hub. Increasingly, foreign companies are vacating their Chinese offices, relocating to countries such as Vietnam or Mexico, where the political environment is more stable and the risks of doing business are lower.
This exodus of foreign investment is a major blow to China’s economy. In the past, foreign capital played a significant role in building the country’s infrastructure, fueling industrial expansion, and creating jobs. As these investments dry up, China’s economic future looks increasingly uncertain.
The manufacturing and property crises, along with the retreat of foreign investors, have hit young Chinese workers the hardest. Youth unemployment has skyrocketed, with nearly one in four young people out of work. This staggering figure comes at a particularly bad time, with a record 12 million Chinese college students set to graduate and enter the job market this year. Many of them will struggle to find employment in an economy where opportunities are rapidly shrinking.
Social Unrest on the Rise
The economic crisis is not just a numbers game—it’s becoming a powder keg for social unrest. As China’s youth struggle to find work and millions face financial ruin due to the property market collapse, public protests are becoming more frequent. In a country where political dissent is harshly punished, the rise of public demonstrations is notable. Banners demanding free elections have appeared on overpasses, and disgruntled ex-soldiers are accusing the government of neglecting veterans’ rights, adding another layer of instability to the situation.
Labor strikes are also on the rise, with a notable example being a strike by 1,000 workers at a Nike factory. These workers revolted after production was moved to Indonesia, highlighting the growing frustration among China’s labor force. Similarly, hundreds of construction workers have staged protests demanding unpaid wages as property developers collapse under the weight of their debts.
The background to these protests is China’s deeply inequitable labor system. Hundreds of millions of Chinese workers are employed informally, without access to social security or job protections. Rural workers, in particular, are often excluded from the benefits of urban economic growth due to China’s restrictive household registration system, which limits their ability to move to cities and find better-paying jobs. At the same time, older workers face an even grimmer prospect: without 15 years of formal work, they are ineligible for government pensions, leaving many at risk of poverty in old age, especially those who remain childless due to China’s former one-child policy.
Xi Jinping’s Economic Gamble Fails
The current crisis is, in part, a direct consequence of President Xi Jinping’s economic policies. Under his leadership, China has seen a dramatic slowdown in growth, with the economy now expanding at about half the rate it did during its peak years. Xi’s focus on consolidating political control has come at the expense of economic liberalization. His government has cracked down on the private sector, with prominent businessmen like Jack Ma, founder of Alibaba, being “disappeared” after criticizing government policy.
Xi’s administration also funneled trillions of dollars into government-favored sectors such as green energy and housing. While these investments were initially seen as a way to boost growth and create jobs, they have backfired spectacularly. The green energy sector, for example, became oversaturated, with nearly 1,500 electric car makers at one point. Most of these companies have since gone bankrupt or are on the verge of collapse. Similarly, the housing market, once the bedrock of economic growth, has turned into a black hole of bad loans and unfinished projects.
Debt Crisis Limits Beijing’s Response
During the global financial crisis of 2008, Beijing responded to economic slowdown with a massive stimulus package that spurred a rapid recovery. However, China’s debt levels have ballooned to over $50 trillion, leaving little room for similar measures today. With the national debt at unsustainable levels, China can no longer afford to inject large amounts of cash into the economy to kickstart growth.
This time, if China’s economy does fall into recession, the government may find itself unable to cushion the blow. The social contract that has kept the Chinese people compliant—one of economic growth in exchange for political obedience—is fraying. Historically, when this contract breaks down, China has experienced significant political upheaval.
Global Consequences: A Geopolitical Tipping Point?
If China’s economic situation deteriorates further, the repercussions will not be limited to its borders. As the world’s second-largest economy and a critical player in global supply chains, a Chinese recession would have significant ripple effects worldwide. Countries that rely on China for trade, investment, and manufacturing could see their economies take a hit.
Moreover, there is a growing concern that if China’s economic crisis deepens, President Xi might seek a nationalist distraction to divert public attention. Taiwan, a longstanding flashpoint in Sino-American relations, could become the target of such a diversion. If China escalates its military posture toward Taiwan, the consequences could be catastrophic, potentially pulling the United States into a major conflict in the Asia-Pacific.
China is standing at a critical juncture. The combination of manufacturing decline, property market collapse, mounting debt, and rising social unrest presents a perfect storm that could push the country into its first significant recession since 2008. The consequences of such a downturn could be far-reaching, not only for China’s 1.4 billion citizens but also for the global economy.
