China struggles to turn its economy around | DW News

Key Concepts

• Property Crisis: A significant downturn in the Chinese real estate market, characterized by declining prices, unsold inventory, and developer debt.
• Domestic Demand: The level of consumption within China, currently described as sluggish and a key area of concern.
• Fixed Asset Investment: Investment in areas like infrastructure, property, and manufacturing, currently experiencing contraction.
• Gig Economy: A labor market characterized by short-term contracts and freelance work, a growing but precarious sector in China.
• State-Led Economy: An economic system where the government plays a dominant role in investment and industrial policy.
• GDP Manipulation: The practice of adjusting reported economic growth figures, raising skepticism about official statistics.
• Technological Focus: Xi Jinping’s prioritization of industries like EVs and AI as drivers of economic growth.
• Unsold Inventory: The large volume of completed but unsold properties, a key indicator of the property crisis (760 million square meters cited).

China’s Economic Slowdown: A Deep Dive

I. Current Economic Situation & Forecasts

The Chinese economy is facing significant headwinds, with a potential for a prolonged period of slow growth akin to Japan’s “lost decade.” While official GDP forecasts project around 5% growth for the current year, these figures are viewed with skepticism due to a history of manipulation and a focus on concrete-based investment as a measure of economic activity. The core issue isn’t necessarily the headline GDP number, but rather the weakness in key indicators like consumption and fixed asset investment. Retail sales growth has hit its lowest pace outside of pandemic periods, highlighting the struggle to stimulate domestic demand.

II. The Property Market Crisis – A Deepening Problem

The property market remains a central concern, having been in crisis for approximately five years. Official data suggests a 2% price decline, but anecdotal evidence from those on the ground indicates much steeper falls – at least 20% in major cities and 30-60% in other areas. This crisis stems from a two-decade-long property bubble fueled by excessive investment. Attempts to reignite the market with further investment are proving ineffective, as a massive 760 million square meters of property remains unsold – exceeding annual sales volume. The situation is compounded by the fact that local governments, traditionally reliant on land sales as a revenue source, are facing financial constraints due to the market downturn. A case study mentioned involves a now-defunct EV company that received billions in subsidies but ultimately failed, leaving substantial debt. This illustrates the broader issue of inefficient capital allocation.

III. Domestic Demand & Government Priorities

Despite widespread calls for stimulating domestic demand, the government’s primary focus remains on transforming China into a global power through technological advancement, particularly in electric vehicles (EVs) and Artificial Intelligence (AI). While the EV industry has experienced growth due to past subsidies, there has been no significant rebalancing of resources from industrial sectors to consumers. Tax breaks, even if implemented, are hampered by the financial difficulties of local governments and the lack of consumer willingness to spend. Andrew Collier notes, “Xiinping is doubling down on his technology bets.”

IV. Investment & The Gig Economy

Fixed asset investment is plummeting, with a recent contraction of 15%. The rise of the gig economy has become a significant source of employment, particularly in areas like food delivery, but this comes with concerns about low wages and job security. Xi Jinping reportedly views the gig economy unfavorably, preferring investment in high-tech industries. This highlights a fundamental disconnect between the realities of the labor market and the government’s strategic priorities.

V. Concerns from the American Business Community

The American Chamber of Commerce in China has expressed concerns about the future of the Chinese economy, citing declining demand and slowing investment. Beyond economic factors, there are also growing concerns about personal safety and the potential for arbitrary legal action against business leaders. Geopolitical tensions, including the ongoing effects of the Trump-era trade war, pose a threat to China’s export-dependent economy, which relies on exports for 37% of its GDP. A shift in export markets towards Southeast Asia and Africa may not fully compensate for potential losses in Europe and the United States.

VI. Unemployment & Structural Issues

Official youth unemployment figures are reported at 17%, but are likely underestimated. The structural shift towards a technology-driven economy, while potentially beneficial in the long term, presents challenges in job creation and requires a robust consumer market to drive demand. China’s experience contrasts with the United States, where consumer spending fueled the growth of the computer industry. China’s state-led economic model and weak consumer base create a risk of accumulating debt without generating sufficient value.

VII. The “Next Big Thing” & Debt Accumulation

China consistently seeks the “next big thing” to drive growth, moving from property to EVs and now AI. However, the pattern repeats: initial investment followed by unsustainable debt accumulation and eventual problems. The EV sector, despite initial success, is plagued by bankruptcies and debt, as exemplified by the case of a subsidized EV company that went out of business owing substantial debts. This pattern is expected to continue with AI, as the government prioritizes investment without addressing the underlying issue of weak consumer demand. Collier states, “A lot of the EVs… that debt is going to be borne by all these local governments and they have no way of paying this back.”

VIII. Path Forward & Potential Reforms

The current situation requires a fundamental shift in economic policy, moving away from state-led investment and towards stimulating domestic consumption. However, China’s history suggests that reforms are only implemented when absolutely necessary. A potential trigger for reform could be a significant rise in unemployment, forcing the government to reallocate resources and prioritize consumer spending. However, as long as the government continues to prioritize technological advancement and maintain its control over the economy, a sustained turnaround remains unlikely.

Notable Quote:

“I don’t see any near-term turnaround. In fact, I see a kind of a slow grind downwards the way Japan did for over a decade.” – Andrew Collier

Technical Terms:

• GDP (Gross Domestic Product): The total monetary or market value of all finished goods and services produced within a country's borders in a specific time period.
• Fixed Asset Investment: Investment in physical assets like buildings, machinery, and infrastructure.
• Gig Economy: A labor market characterized by short-term contracts and freelance work.
• Subsidies: Financial aid provided by the government to support specific industries or businesses.
• National People's Congress: The highest organ of state power in China.
• Five-Year Plan: A series of social and economic development initiatives set by the Chinese Communist Party.

Conclusion:

The Chinese economy is facing a complex set of challenges, including a deepening property crisis, sluggish domestic demand, and a reliance on state-led investment. While the government is prioritizing technological advancement, the lack of consumer spending and the accumulation of debt pose significant risks. A fundamental shift in economic policy is needed to address these issues, but the likelihood of such a shift remains uncertain. The outlook suggests a prolonged period of slow growth and potential economic stagnation, mirroring Japan’s experience in the 1990s.