China’s economic engine seems to be sputtering to a halt, unlike the more optimistic point of view that many mainstream media outlets took at the beginning of 2023. Instead of an economic comeback after the reversal of a zero-Covid policy, the largest communist country in the world seems to be heading towards a meltdown with dire consequences.
Instead of experiencing high inflation rates like countries in the West, China faces the opposite problem: deflation and a shortage of economic demand. This situation means that Chinese consumers are not spending enough. According to official statistics for July, consumer prices had dropped by 0.3 percent compared to a year earlier, following a period of stagnancy.
In July, China’s exports dropped by 14.5 percent, at the steepest pace since early 2020. Notwithstanding two months of increases earlier this year, the plummeting volume of Chinese exports has become a trend going back a full 12 months.
Exports to the U.S. nosedived a significant 23.1 percent in July amid worsening political and trade relations between China, the U.S., and Europe. During the previous Trump administration, the U.S. enforced across-the-board tariffs on Chinese imports. The current Biden administration has stuck to the Trump-era policy, adding restrictions on investment in major Chinese sectors like advanced computer chips.
After the highly-criticized Shanghai lockdown last year, retailers in the U.S. and Europe ordered as much as three months’ worth of inventory from Chinese factories to preempt delivery delays, said Richard Fattal, co-founder of Zencargo, a London logistics company. In recent months, companies have been ordering half that amount, depressing China’s exports for at least a period of time.
Complicating matters further have been the fact that manufacturers have been reshoring production and rerouting their supply chains out of China. Furthermore, reduced factory activity since the onset of the lockdowns corresponds with the drop in exports. Concurrently, China’s imports decreased by 12.4 percent last month due to a steep drop in crude oil (20.8 percent).
The shadow of Chinese authoritarian leader Xi Jinping’s infamous zero-Covid measures and widespread crackdowns still looms in the horizon and affects some of China’s industries. China computes its GDP by comparing each quarter vis-a-vis the same quarter in the previous year, while the U.S. compares each quarter’s output to the quarter right before it and projects growth for the entire year.
Owing to the adverse impact of Xi’s lockdowns in the economic hub of Shanghai with around 25 million people, comparing this spring and last spring offers “a misleading picture of China’s economic performance,” stated Diana Choyleva, the chief economist at Enodo Economics in London.
Rather, analysts posit that a more precise measure of the economy can be calculated by comparing the second quarter of 2023 with the previous three months, following Beijing’s abandonment of Xi’s zero-Covid policy.
If that were to be done, China’s output was only 0.8 percent higher in the second quarter than the first quarter. Extrapolate this figure for the entire year and one would get a growth rate of a little over three percent annually, down from about nine percent in the first quarter.
Notwithstanding the Chinese central bank’s decision to slash rates to promote lending, new loan volumes, according to the People’s Bank of China, plunged to their lowest monthly amount in July since 2009—over ten years ago—as another figure that augments the argument of economic deflation.
A longstanding engine of economic growth accounting for as high as 26 percent of GDP, China’s real estate sector is also teetering due to a slate of developer defaults since 2021, tight liquidity and dropping sales.
Real estate developer Country Garden, one of China’s top five, has failed to account for two bond interest payments, based on mainland China reports. Once regarded as a more financially robust developer, Country Garden’s liquidity issues are causes for concern given Evergrande (another giant real estate developer)’s collapse two years ago.
Besides, Country Garden’s problems could also have a spiraling adverse impact on homebuyers and financial firms, with more private developers about to go over a cliff’s edge without timely help from Beijing.
Intensifying fears about contagion risk and mounting pressure on Beijing to offer support, a major Chinese trust company that used to have considerable exposure to real estate, Zhongrong International Trust Co, has missed its repayment obligations on certain investment products.
For years, the Chinese Communist Party (CCP) has been engineering the economy, chasing economic growth at any expense. As a consequence of such economic policies, one can find today in China many unprofitable infrastructure projects, vacant apartments and commercial properties, as well as an oversupply in various sectors like manufacturing, allowing the country to inundate the world with cheap and sometimes poor-quality products.
Local governments are at the crux of present worries regarding the debt crisis, for they had borrowed intensively for years in a speculative bonanza, bankrolling the construction of roads, bridges and industrial parks.
In March this year, Chinese authoritarian leader Xi Jinping said that private companies should be “rich and loving” by partnering with state-owned firms to attain what he termed as “common prosperity” for all.
“Be rich and responsible, be rich and benefit others, be rich and loving,” the communist-controlled radio cited Xi as stating, pushing the politics of sloganeering in authoritarian China to unprecedented heights.
Xi added that China would always regard private firms and entrepreneurs as “family” and promised to eliminate institutional barriers that deter private companies from competing fairly, state radio reported.
Despite Beijing’s promises to support a private sector aching from a regulatory crackdown in the property, technology and private education industries, among others, and barely reeling from state-imposed lockdowns that were lifted only late last year, the private sector—including small- and medium-sized businesses championed by entrepreneurs—has been drastically reduced.
Additionally, Xi’s “common prosperity” doctrine in 2021 has only the effect of limiting private sector growth rather than propelling it. Some of China’s biggest tech companies, such as Alibaba and Tencent, have been coerced into pandering to CCP political demands instead of prioritizing creativity and innovation.
In light of the situation on the ground, there could not be a greater disconnect between the CCP elite’s rhetoric and the lives of ordinary Chinese folk. Alarming unemployment rates are plaguing Chinese citizens, with urban unemployment for youths, 16 to 24-year-olds, spiraled to a record high of 21 percent in June, three times the rate in the U.S., official data displayed.
A Chinese scholar cited by Caixin, a mainland business magazine, asserted that the actual unemployment rate might be even more dismal, with as high as 46 percent of China’s youths being unemployed.
Hypothetically, in an upbeat scenario, the CCP could spearhead the economy gradually in the direction of slower growth, exchanging factory jobs for service roles, while trying to minimize the size of real estate losses.
Nonetheless, should the debts beleaguering China’s economy limit the efficacy of the CCP’s response, China would witness an exodus of money and plummeting housing prices, leading to more joblessness and business closures. The possibility of social unrest is not to be excluded, for although China is controlled by the unelected CCP, large numbers of disgruntled people may bring mayhem.
Recent events, such as the massive rainfall that struck Beijing, Tianjin and parts surrounding Hebei Province, have compounded the prevalent perception that Xi has lost the “mandate of Heaven” and, hence, his capacity to govern “all under Heaven”.
However, an internal CCP document dated August 7 has suggested that the CCP purposely diverted floodwaters to surrounding areas in Hebei Province to safeguard Beijing and new political hub Xiong’an, resulting in cities, villages and vast areas of farmland being immersed in rapidly rising water.
Apart from the astronomical loss of life, property and livelihood, the diverted floods due to CCP machinations have also ruined large scale high-tech industrial parks over there, further denting the economic prospects of Chinese state-owned tech enterprises.
Based on the data gathered, as some projects are still submerged in floodwaters as deep as 20 feet, figures for losses are only estimates and the specific losses have yet to be confirmed. The report further stated that China Shipbuilding Industry Corporation (CSIC), a military enterprise that produces aircraft carriers, incurred the biggest loss. Six of its sub-companies and projects lost equipment and property worth hundreds of millions of yuan.
Also, the construction project of the China Power Research Center in the China Shipbuilding Industry Marine Equipment Science and Technology Industrial Park lost 10 million yuan (US$1.38 million) based on preliminary figures.
Time will tell if China’s economic woes will herald in an opening when the economic façade is about to come crashing down, and in the longer term, and if economic discontent will result in a significant erosion of public trust for the Beijing elite.
That being said, a realistic short-term prospect will be to witness, in an attempt to divert from domestic problems, an increasingly desperate Xi trying to remove political rivals, trying to sow conflict on the international stage with countries like the U.S. and Japan, as well as distract ordinary Chinese with issues like Taiwan.
Recently, U.S. president Joe Biden alluded to China’s economic vulnerabilities as “a ticking time bomb,” adding: “When bad folks have problems, they do bad things.” In spite of his political gaffes and own inability to manage America’s economy and foreign policy, Biden is ominously right about China this time round.
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