China’s Fading Recovery Reveals Deeper Economic Struggles
Ballooning debt, tepid consumption and worsening relations with the West to weigh on growth, economists say
China’s era of rapid growth is over. Its recovery from zero-Covid is stalling. And now the country is facing
deep, structural problems in its economy.
The outlook was better just a few months ago, after Beijing lifted its draconian zero-Covid controls, setting off a flurry of spending as people
ate out and splurged on travel.
But as the sugar high of the reopening wears off, underlying problems in China’s economy that have been building for years are reasserting themselves.
The property boom and government overinvestment that fueled growth for more than a decade have ended.
Enormous debts are crippling households and local governments. Some families, worried about the future,
are hoarding cash.
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Chinese leader Xi Jinping’s
crackdowns on private enterprise have discouraged risk-taking, while deteriorating relations with the West—exemplified by
a new campaign against international due diligence and consulting firms—are stifling foreign investment.
Economists say these worsening structural problems are hobbling China’s chances of extending the growth miracle that transformed it into a rival to the U.S. for global power and influence.
Instead of expanding at 6% to 8% a year as was common in the past, China may soon be heading toward growth of only 2% or 3%, some economists say. An aging population and
shrinking workforce compound its difficulties.
China could drive less global growth this year and beyond than many business leaders expected, making China less important for some foreign companies, and less likely to significantly surpass the U.S. as
the world’s biggest economy.
“The disappointing recovery today really suggests that some of the structural drags are already in play,” said Frederic Neumann,
chief Asia economist at HSBC.
China’s economy expanded at an annual rate of 4.5% in the first quarter, boosted by the end of Covid-era restrictions.
Yet more recent signals suggest
the revival is ebbing. Retail sales rose just 0.5% in April compared with March. A bundle of data on factory output, exports and investment came in much weaker than economists were expecting.
More than a fifth of Chinese youths aged 16 to 24
were unemployed in April. E-commerce giants
Alibaba and
JD.com reported lackluster first-quarter earnings. Hong Kong’s Hang Seng Index, dominated by Chinese companies, is down 5.2% year to date, and the yuan has weakened against the U.S. dollar.
Most economists don’t expect China’s problems to lead to recession, or derail the government’s growth target of
around 5% this year, which is widely seen as easily achievable given how weak the economy was last year.
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A boom in electric-vehicle production allowed China to surpass Japan as the world’s largest exporter of vehicles in the first quarter. Beijing’s industrial policies and China’s manufacturing prowess mean it is still finding ways to succeed in some major industries.
“We still have confidence in the long-term growth story of China,” said Phillip Wool,
head of research at Rayliant Global Advisors, an asset manager with $17 billion under management. He said the country’s transition to one that relies more on domestic consumption instead of exports will help keep it on track.
Still, many economists are growing more worried about China’s future.
The big hope for this year was that Chinese consumers would dramatically step up spending, as the main drivers of China’s past growth—investment and exports—languish.
But while people are spending somewhat more after almost three years of tough Covid-19 controls, China isn’t experiencing the kind of surge other economies enjoyed
when they emerged from the pandemic.
Consumer confidence is low. More important, some economists say, is that Beijing hasn’t been able to meaningfully change Chinese consumers’ long-running propensity to save rather than spend—a response to a threadbare social safety net that means families must sock away more for medical bills and other emergencies.
Chinese household consumption accounts for around 38% of annual gross domestic product, according to United Nations data, compared with 68% in the U.S.
“Consumer-led growth has always been a bit of an aspirational target” for China, said Louise Loo, China lead economist in Singapore at Oxford Economics, a consulting firm. Now, it may be even harder to achieve, she said, given how cautious Chinese consumers are coming out of the pandemic.
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Although Beijing is trying to make it easier to borrow this year, lending data indicate households prefer to pay down debt than take on new loans.
In March, Zi Lu dipped into her dowry and paid off the remaining 1.2 million yuan, equivalent to about $170,000, on her mortgage for an apartment she bought in Shanghai two years ago. Working for an e-commerce retailer, she said sales have been underwhelming this year. Lu said she is anxious and wants to reduce her debt burden.
“I’m scared of getting laid off out of the blue,” she said.
Also looming over the economy is
its massive debt pile.
Between 2012 and 2022, China’s debt grew by $37 trillion, while the U.S. added nearly $25 trillion. By June 2022, debt in China reached about $52 trillion, dwarfing outstanding debt in all other emerging markets combined, according to calculations by Nicholas Borst, director of China research at Seafarer Capital Partners.
As of last September, total debt as a share of GDP hit 295% in China, compared with 257% in the U.S., data from the Bank for International Settlements shows.
Viewing the debt buildup as a threat to financial stability, Xi has made deleveraging a centerpiece of his economic policy since 2016, weighing on growth.
To help deflate the country’s housing bubble, regulators imposed strict borrowing limits for property developers from late 2020. Property development investment fell 5.8% in the first quarter of this year despite policy efforts to stem the pace of the slide.
Ballooning debt, tepid consumption and worsening relations with the West are set to weigh on future growth, economists say.
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