The world’s second-largest economy is sputtering out, with China facing trials and tribulations that include record youth unemployment and consumer price deflation, raising the spectre of prolonged economic misery that could rip through financial markets.
Already grappling with 21-per-cent joblessness among 16-to-24-year-olds and its weakest GDP growth in decades – “around 5 per cent,” according to the government – China’s hoped-for economic rebound from rigid COVID-19 lockdowns is showing signs of severe strain.
In the past week China reported that new bank lending in July had fallen to its lowest level since 2009; yet another major developer, Country Garden, missed interest debt payments; and consumer prices fell year-over-year last month, confirming fears that domestic demand is uncharacteristically soft.
The country’s financial outlook is deteriorating so quickly that some economists now fear its stimulus-fuelled property bubble could finally burst, turning China into another Japan, mired in muted growth and financial pain for decades.
Should such a scenario unfold, the knock-on effects in Western markets would be substantial. The hope for resurgent Chinese demand has propped up the prices of multiple commodities – many of which are produced by Canadian companies – and China’s rebound was expected to offset slowing economic growth as inflation bites in Europe and North America.
At this point it is unclear if China will fall into such an economic trap. The country has faced significant financial disruptions before but found its way out by unleashing major government spending, notably in 2008 and 2016. The trouble this time is that China may already be maxed out, with total debt-to-GDP hovering near 300 per cent in 2022, higher than both the United States and the euro zone, according to the Bank for International Settlements.
“They can’t really make much use of the old playbook,” said David Dollar, a senior fellow at the Brookings Institution in Washington D.C., and a former economic and financial emissary to China for the U.S. Treasury. “And they’re reluctant to shift to a new playbook.”
Chinese President Xi Jinping has also signalled that he now wants a different type of economy – one less dependent on government money propping up real estate values and funding infrastructure development. The Communist Party’s “sustained emphasis on ‘high quality growth’ signals that the authorities are not ready for an all-out stimulus,” wrote Bert Hoffman, the director of the East Asian Institute at the National University of Singapore and the World Bank’s country director for China from 2014 to 2019, in a recent report.
Because a Chinese downturn has the potential to degenerate into an economic collapse, the default thinking among many Western analysts is that Beijing will step in once the pain really starts to hit. However, China experts stress that Mr. Xi has a much different mindset, and they point to China’s recent crackdown on its booming tech sector as an example of how ruthless the government can be; even though the sector was a major boon for the economy, the ruling party worried that tech giants such as Alibaba were growing too powerful.
“Security, broadly defined, is more important than economic development,” Mr. Dollar said of the government’s mentality.
China’s economic woes have been brewing for years, spurred by structural forces such as an aging population and soaring government debt, particularly at the local level. For years the country kept these forces at bay with heavy government spending, money that often found a home in the real estate sector.
But even before the pandemic hit, Beijing seemed aware that the sector was overheated and started using the mantra “housing is for living in, not for speculation.”
The government tightened developers’ access to credit, forcing them to rely more on advanced sales to fund their projects. Much of that financing dried up during the pandemic, and the drought contributed to developer woes that came to light when Evergrande, a massive real estate company, defaulted on debt in 2021. The company has since posted US$81-billion in losses.
With China’s real estate sector wobbling, the economy has started a downward spiral that is now showing up in record youth unemployment and in deflation, with the consumer price index falling 0.3 per cent in July from the year prior. The fear now is that psychological forces will take over and consumers will be scared to spend because there is so much uncertainty.
Despite the pain, Jia Wang, interim director of the China Institute at the University of Alberta, said China has mistakenly been written off before. “We shouldn’t underestimate its ability to bounce back from a sluggish recovery,” she said in an interview.
Plus, she added, the government is still mindful of the mass protests that erupted after years of draconian pandemic lockdowns. “That’s something the central government really doesn’t want,” she said.