China appears to be slipping into an era of much slower economic growth – a sad reality that many Chinese have probably already accepted.
Prospects for the world’s second largest economy are unclear, with some analysts suggesting steady growth of 3-4% a year, while others say deflationary pressures could cause years of stagnation, similar what Japan experienced in the 1990s.
Either way, it looks set to disappoint its leaders, youths, and countries that hoped to gain from China’s growth.
One of the latest worries is the “four no’s” attitude, among young workers or graduates who have given up the dream of owning a home, and even the idea of dating, getting married and having a family, because of the expense that entails.
Policymakers had sought to narrow China’s development gap with the United States. Young Chinese went to universities to study for advanced-economy jobs. Africa and Latin America count on China buying their commodities.
But doubts on China’s future are growing. Desmond Lachman, a senior fellow at the American Enterprise Institute, said: “It is unlikely that the Chinese economy will surpass that of the United States within the next decade or two.”
He expects growth to slow to 3% – which “will feel like an economic recession” – given youth unemployment is already above 20%. “This is not good for the rest of the world economy” either, he added.
Loss of momentum from recent decades
When Japan began to stagnate in the 1990s, it had already exceeded the average GDP per capita of high-income economies and was nearing US levels. China, however, is only just above the middle-income point.
Second-quarter growth of 6.3% underwhelmed, considering the low base caused by last year’s Covid lockdowns, raising pressure on Chinese leaders who are expected to meet this month to discuss a short-term boost and longer-term fixes. The April-June data puts 2023 growth on track for roughly 5%, with slower rates thereafter.
But China’s annual growth averaged around 7% last decade, and more than 10% in the 2000s.
Prompted by such loss in momentum, economists no longer ascribe weak household consumption and private-sector investment to the pandemic’s effects, blaming structural ills instead.
These include the burst of a bubble in the property sector, which accounts for a quarter of output; one of the deepest imbalances between investment and consumption; a mountain of local government debt; and the Communist Party’s tight grip over society, including private businesses.
And China’s workforce and consumer base are shrinking while the cohort of retirees is expanding.
“The demographic problem, hard landing of the property sector, heavy local government debt burden, pessimism of the private sector as well as China-US tensions do not allow us to hold an optimistic view towards mid- to long-term growth,” Wang Jun, chief economist at Huatai Asset Management, said.
China’s National Development and Reform Commission (NDRC) did not reply to questions on growth prospects, structural weaknesses and reform plans.
Some sectors struggling, calls for social safety net
NDRC head Zheng Shanjie, in a July 4 article in the official “Qiushi” magazine, made a rare reference to the middle-income trap, saying China needed to “accelerate the construction of a modern industrial system” to avoid it.
Zheng was referring to developing nations’ struggle to transition from mid- to high-income levels due to rising costs and declining competitiveness.
Economists cite China’s electric vehicle boom as evidence of progress, but much of its industrial complex is not upgrading at the same speed. Overseas car sales account for only 1.7% of exports.
“Many observers will look at some of the companies and say, wow, China can come up with all these fantastic products, so the future should be bright. My question is: Do we have enough of those companies?” Richard Koo, chief economist at the Nomura Research Institute, said.
Policymakers have said they want household consumption to drive growth, without hinting at concrete steps.
Juan Orts, China economist at Fathom Consulting, said boosting consumer demand might redirect resources away from supporting manufacturing exporters, which partly explains hesitancy toward such reforms.
“We don’t think authorities will commit to that path,” said Orts, describing it as “the way out” of economic doldrums.
Rather, China took steps the other way.
President Xi Jinping’s “common prosperity” drive against inequality has encouraged salary reductions in finance and other sectors. Deteriorating city finances prompted pay cuts for civil servants, feeding a deflationary spiral.
Zhao, a manager at a Beijing-based bank, feels she will never get rich, her salary remaining unchanged through several promotions. Instead of working hard, she said, she plans to retire in her 40s to a smaller, cheaper city.
“I missed the golden era for banks,” Zhao said on the condition of partial anonymity as she was not authorised to speak to the media.
Many economists have called for better public healthcare, higher pensions and unemployment benefits, and other building blocks for a social safety net to give consumers confidence to save less.
Central bank adviser Cai Fang called this month for consumption stimulus, including changes to China’s residence permits, or hukou, which deny public services to millions of rural migrants in the cities they work in.
Zhu Ning, deputy dean at the Shanghai Advanced Institute of Finance, said improving social welfare could make growth rates of 3-4% more sustainable.
‘Change of course needed’
Koo said China’s problems are more challenging than Japan’s a generation ago, giving policymakers room for error should they seize the “last chance” to reach developed-world living standards.
China, in his assessment, has a “balance sheet recession”, with consumers and businesses repaying debt instead of borrowing and investing.
This, he said, is how depressions start and the only cure is “speedy, substantial and sustained” fiscal stimulus, which he did not see as forthcoming given China’s debt concerns.
Beyond that, he said stimulus must be productive, and complemented by changes that allow the private sector to emerge from under the shadow of the state, including through better relations with source countries of foreign investment.
But China would need to reverse course.
Infrastructure investment in recent years has generated more debt than growth.
As major economies try to reduce dependence on China, Beijing remains locked in tit-for-tat trade battles, the latest over metals used in semiconductors.
“Every time the US announces some anti-China policy, the Chinese government comes up with an equivalent one. But the Americans are not in the middle income trap. China is,” Koo said.
“If Chinese people do not reach their Chinese dreams, perhaps you will have 1.4 billion not very happy people over there, which might be rather destabilising.”
- Reuters with additional editing by Jim Pollard