HONG KONG: China’s disappointing post-Covid recovery raises significant doubts about the foundations of its decades of stunning growth and presents Beijing with a tough choice for 2024 and beyond – take on more debt or grow less.
The expectations were that once China ditched its draconian Covid rules, consumers would burst back into malls, foreign investment would resume, factories would rev up, land auctions would be held and home sales stabilise.
Instead, Chinese shoppers are saving for rainy days, foreign firms pulled money out, manufacturers face waning demand from the West, local government finances wobbled and property developers defaulted.
The dashed expectations have partly vindicated those who always doubted China’s growth model, with some economists even drawing parallels with Japan’s bubble before its “lost decades” of stagnation starting in the 1990s.
China sceptics argue Beijing failed to shift the economy from construction-led development to consumption-driven growth a decade ago, when it should have done so.
Since then, debt has outpaced the economy, reaching levels that local governments and real estate firms now struggle to service.
Policymakers vowed this year to boost consumption and reduce the economy’s reliance on property. Beijing is guiding banks to lend more to high-end manufacturing, away from real estate.
But a concrete long-term roadmap for cleaning up debt and restructuring the economy remains elusive.
Whatever choices China makes, it will have to account for an ageing and shrinking population and a difficult geopolitical environment as the West grows wary of doing business with the world’s second-largest economy.
China will likely grow by 5% or so in 2023, outpacing the global economy.
However, beneath that headline is the fact that China invests more than 40% of its output – twice as much as the United States – suggesting a significant portion of that is unproductive.
That means many Chinese don’t feel that growth. Youth unemployment topped 21% in June, the last set of figures before China controversially stopped reporting.
University graduates who studied for advanced-economy jobs are now taking up low-skilled positions to make ends meet, while others have seen their wages cut.
In an economy where 70% of household wealth is parked in property, homeowners are feeling poorer. Even in one of the few bright spots of the economy, the electric vehicle sector, a price war is causing pain downstream for suppliers and workers.
The national pessimism could present President Xi Jinping with social stability risks, analysts said.
If China does slip into a Japan-style decline, it would do so before ever achieving the kind of development Japan did.
That would be felt widely, as most global industries depend significantly on suppliers in China.
Africa and Latin America count on China to buy their commodities and finance their industrialisation.
China’s problems give it a little time before it has to make some tough choices.
Policymakers are keen to change the structure of the economy, but reform has always been difficult in China.
A push to boost welfare for hundreds of millions of rural migrant workers, who could, by some estimates, add 1.7% of gross domestic product to household consumption if they had similar access to public services as urban residents, is already stalling due to worries about social stability and costs. — Reuters
Source: The Star