China’s Economic Challenges: Causes and Consequences
Shanghai Skyline. Image Source: Wikimedia Commons
by Abhiram Vissa*
Introduction
The Chinese economy is currently facing several challenges that have negatively impacted China’s economic outlook and delayed its projected takeover of the United States as the world’s largest economy. The economic slowdown is a result of challenges such as the ageing population due to the one-child policy, the stress in the Chinese property market, rising youth unemployment, falling consumer demand, the COVID-19 pandemic and the government’s zero COVID strategy. President Xi Jinping’s policies have exacerbated the economic crisis. In addition, myriad geopolitical tensions because of China’s belligerent actions with its neighbours in South Asia, Southeast Asia, East Asia, and major powers such as the United States (US) have generated stress on Beijing’s external economic interactions as well. Further, there are concerns about intensifying social instability, which could potentially undermine the legitimacy of the Chinese state. This paper analyses the various challenges faced by the Chinese government and the measures that the government is taking to address them. China’s emergence as a preeminent power in the world will be contingent on the policies it will pursue to address various economic and political challenges.
Major Economic Challenges
Property Sector Crisis: The crisis in the Chinese property market, which was once a key driver of growth in the world’s second-largest economy, has worsened, with home prices seeing their sharpest decline in December 2023.[1] The property crisis coincided with declining investments by developers and several major developers like the Evergrande group and Country Garden defaulting on their debts.[2] Local government debt has totalled a staggering thirteen trillion dollars.[3] Approximately thirty-four real estate companies are going into debt, and as a consequence, Chinese citizens will not be able to own properties in such estates.[4] This shows the extent to which the property market has been affected and the long-term danger to China’s economic health.
Chinese economic policy under President Xi Jinping is another major contributing factor. He is reorienting the economy by prioritising the public sector and establishing more state control over it. The private sector is receiving lower priority as Xi’s economic policy aims to strengthen the control of the Communist Party of China (CPC) over the country. Entrepreneurs like Jack Ma, who were seen as undermining the authority of the government due to his public criticism of the government’s economic policy, were detained. Jack Ma led Alibaba was split into six different entities.[5] The arrest was a sign that there would be no tolerance of criticism, the private sector would work to serve the state’s interests, and the era of giving entrepreneurial freedom would end.
Ageing Population: China’s ageing population and falling birth rates are other major problems that the economy faces. Decreasing birth rates because of the One Child policy went in conjunction with a more educated/affluent populace keen on maintaining micro families.[6] Such shifts contributed to the ageing population, the shrinking of the labour force and the need for more pension support for the elderly from the government. In 2023, the Chinese population fell by two million, which was the second straight year in decline.[7] The current 1.15 births per woman is far below the replacement of 2.1 births.[8] Since 2016, there has been a decline in the number of recorded births.[9] China does not have immigrant-friendly policies allowing foreigners to live and work in the country and obtain citizenship. China’s demographic challenges are particularly alarming as its population is projected to be below 1 billion by 2080 and below 800 billion by 2100.[10] These projections have ominous repercussions for the Chinese labour force and China’s overall economic growth.
Zero-COVID Policy: During the COVID pandemic, the Chinese government pursued a tough policy of repeated lockdowns, restricted travel, mandatory testing, and placing whole cities like Shanghai under lockdown to contain the spread of the pandemic. The rigorous shutdown policy was especially severe in southern eastern and eastern China, where China’s manufacturing and commerce centres. Consequently, the country’s economy and society were adversely impacted. There were demonstrations against the harsh government restrictions throughout 2022, which ended in December of that year. However, the economic impact of the government’s tough stance resulted in thousands of businesses going bankrupt, factories being closed, youth unemployment, falling consumption, and decreased growth.[11]
The Chinese economy is still reeling from the impact of the COVID-19 pandemic. The government claims that the economy grew by 5 per cent annually in 2022 and 2023, but the International Monetary Fund claims that the Chinese economy declined in terms of real GDP, which contradicts the Chinese government’s claims.[12] Urban unemployment rose to 5.5 per cent, and the youth unemployment rate of those aged 16-24 per cent rose to 21.3 per cent in 2023.[13] Foreign investment is at a thirty-year low, and enterprises with foreign investment exited the country.[14]
China’s aggressive response to COVID-19 demonstrated a commitment to eradicating the epidemic without considering the long-term impact on the economy. A facet of the Chinese government’s response has been to reject any criticism of its methods, deny any responsibility for making the problem even worse and claim that the country was the victim of foreign conspiracies meant to undermine China. The government’s propaganda campaign claimed that there was no negative impact of its COVID-19 policies on the economy. However, the rollback of the zero COVID policy showed that the government was aware of public sentiment and had to change course to prevent further discontent lest it undermine the government’s control over the country.
Measures to Counter Economic Challenges: Among the measures the government adopted to deal with the slowdown were the reduction of borrowing costs and increased investment in infrastructure development.[15] Beijing issued a 141 billion dollar bond in October 2023, which failed to simulate the infrastructure sector.[16] The government got banks to increase their sale of bonds, but the uncertainty of China’s property market has raised questions about the quality of these bonds.[17] The government has also created a new positive narrative focused on technological growth like domestic chip production, artificial intelligence, electric vehicle manufacturing, and 5.5g technology. China has also launched ambitious infrastructure development programmes in the developing world to increase Chinese influence. This narrative portrays China‘s economy as one that is growing and providing new opportunities for its citizens. The Central Economic Work Conference in December 2023 focused on dealing with the property market, “local government debt, and small and medium financial institutions.[18]” Deploying nationalist rhetoric that criticism of the government’s policies is part of a Western plot to undermine the government and destabilise the country constituted another important vector in the government strategy. The government insists that its strategy in dealing with the pandemic has successfully contained COVID-19 and refuses to accept any responsibility for the negative consequences of its policies. The anti-western rhetoric has been accompanied by a more protectionist and inward-looking mind-set that sees threats to the country everywhere.
Conclusion
The Chinese economy has been beset with several serious challenges that question the future of the Chinese economic miracle narrative. The COVID-19 pandemic and the government’s determination to control the outbreak have led to more youth unemployment, lower growth and falling consumer demand. China’s ageing population and the crisis in its property sector have only exacerbated the problem and pose long-term challenges to China’s economic growth. China’s goal to overtake the United States as the world’s largest economy has not materialised, and it is questionable whether the government’s measures to deal with the country’s economic challenges will be effective in solving them or if they are too little too late.
* The author is an Associate Fellow at the Center for Human Security Studies in Hyderabad. The views expressed here are personal.
Endnotes
[1] Gao, Liangping. Ryan Woo. China’s property market slide worsens despite government support. Reuters. January 17, 2004.
[2] Ibid.
[3] Mark, Jeremy. China’s local government debts are coming due. Atlantic Council. January 10, 2024.
[4] Wilkins, Joshua. Despite Country Garden’s last-gasp payment, China’s property sector remains in crisis: two-thirds of its developers with most offshore debt are defaulters. Business Insider. September 5, 2023.
[5] Gunter, Jacob. Case study: Alibaba falls in line on national strategic goals, breaks itself up. Mercator Institute of China Studies. October 12, 2023.
[6] Lucero-Prisno, Don Eliseo. M.B.N. Kouwenhoven. Shuaibu Saidu Musa. The challenges of the low birthrate in China. Public Health Challenges, Volume 1, Issue 2. 15 June2022.
[7] Minzner, Carl. China’s Population Decline Continues. Council on Foreign Relations. January 26, 2024.
[8] Ibid.
[9] Kirkegaard, Jacob Funk. China’s population decline is getting close to irreversible. Peterson International Institute of Economics. January 18, 2024.
[10] O’Hanlon, Michael. China’s shrinking population and constraints on its future power. Brookings Institute. April 24, 2023.
[11] Sela, Ori. China’s “Zero-COVID” Policy and its Economic Effects. Institute for National Security Studies INSS Insight Number 1669. December 14, 2022.
[12] Calhoun, George. The Missing Factor In Explanations of China’s Economic Distress: COVID-Part 1: The Cover-Up. Forbes. May 4, 2024.
[13] Li, Haizengh. Xiangyuan Li.The COVID-19 Pandemic’s Impact on the Chinese Economy. China Currents. Issue 2023: Volume 22, Number.1. The China Center.
[14] O’Sullivan, Mike. Foreign Investment in China Tumbles to a 30- Year Low. Forbes. February 19, 2024.
[15] Low, Donald. China’s Chronic Zero COVID Trauma. The Diplomat. February 15, 2024.
[16] Ibid
[17] Ibid.
[18] Liu, Zongyuuan Zoe. Everything Comes Back to Property. Foreign Policy. February 26, 2024.
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