China’s economy has been a subject of global concern due to lacklustre growth and rising uncertainty. Despite a strong start to 2023, Chinese economic activity has fallen short of expectations, with exports collapsing, consumption, production, and investment slowing, inflation leveling out, and unemployment increasing.
The Chinese renminbi hit new lows in August and September 2023, driven by domestic economy concerns. Former US treasury secretary Larry Summers has made ominous comparisons between China, Russia, and Japan, comparing economic forecasts to those made in 1960 or 1990.
The economic outlook is influenced by cyclical and structural factors, including the COVID-19 pandemic’s scars, deteriorating balance sheets, an ailing property sector, and limited macroeconomic policy response. Structural pressures are also weighing on confidence, with regulatory, security, and political stability concerns mounting. China’s biggest worries revolve around the property sector, which could collapse if collapsed.
China’s property market is different from the 2007-08 US subprime crisis due to the lack of visible negative equity, primarily due to substantial down payments required for second or third property purchases. If property prices drop, the property sector’s contribution to financial crisis risk would be smaller than that of the United States in the global financial crisis. Despite facing deflation rather than inflation risk, China’s fiscal and monetary responses have been modest, with real interest rates remaining relatively flat since late 2020.
The lack of aggregate easing reflects current policy objectives, with supply-side reforms dominating demand-side considerations. Structural pressures on Chinese growth include regulatory actions that have dampened business confidence, particularly among technology companies and foreign-invested enterprises.
These policies were implemented to address national security concerns and legitimate regulatory problems, such as consumer protection and fair competition. The government has moved to offset some of these negative policy impacts by introducing new policies aimed at boosting confidence and supporting private enterprise, foreign-invested firms, and consumption. The 31-point plan released in July 2023 emphasizes the importance of the private sector, fair competition, and attracting private enterprises into national projects.
The changing geopolitical environment is impacting the economy, with China and the US focusing on national security concerns that affect trade and investment. Cooperation to address globalisation challenges requires dialogue and regional relations, such as the European Union’s ‘de-risking’ approach and ASEAN. China’s economic miracle may have ended, but it is not the Soviet Union or Japan in the 1960s or 1990s. However, sectors like technology platforms, electric vehicles, green energy, and electronics are now vital sources of innovation and growth.
A major financial crisis is unlikely, and the economic impact of demographic shifts will be partially countered by artificial intelligence and the digital economy. Regulatory changes have dampened some sectors, but China’s ability to average above 9% growth for 40 years suggests some flexibility.
The recent announcement of a new policy package demonstrates that policymakers respond to economic challenges. Economic activity likely suffered its last major drop in July 2023, and August data suggests a gradual bottoming out. However, the fog of geopolitics is unlikely to recede soon, as many of the challenges China faces are global. Addressing these concerns within global frameworks that promote open trade and investment will be crucial to navigating the uncertainties ahead.