CORE #4: Navigating China’s Economic Meltdown: The End of The 40-year Boom?

What This Is All About

After its 40-year steady growth, China is currently climbing the global economic ladder as the world’s second strongest power. Averaging 9.5% Gross Domestic Product (GDP) growth through 2018, the World Bank described China as “the fastest sustained expansion by a major economy in history” (Congressional Research Service, 2019). The dominance, however, was vitally tested as waves of Covid-19 pandemic hit and China had exerted Zero-Covid policy which restrained the nation until early 2023 (Uretsky, 2022). Once the bridle was removed, many expected China’s economy to quickly recover, driven by rebound consumption as normalization economic activities and stabilization of the property sector took place after Covid. Data, nevertheless, shows a different reality (Ni, 2023). 

Contrary to the growth in the first quarter of the post-pandemic year, the second quarter’s economy recovered at a slower-than-expected pace. Gaining 4.5% growth in the first quarter, China’s economic growth dropped to merely 0.8% in the second quarter of the year (Sharp, 2023). Although it might look endurable, the government was not satisfied as in the past 15 years, China had maintained their average GDP to be constantly above 10% (Bloomberg, 2023). To date, it was falling short of the market ideal estimation by 7.3%. Furthermore, the dollar value of Chinese exports also shrank by more than 12 percent. Additionally, consumer goods’ prices dropped by 1.4%, which is notably the lowest number since the 2008 global financial crisis (Sharp, 2023). The drop pictures the public demand’s slowdown, which will further affect the economy’s aggregate growth.

As disappointing figures keep coming out, mixed responses start arising, in doubt of The Red Dragon’s stability. This unleashes various interesting viewpoints to be dissected jointly.

Factors of Economy Slowdown and Government’s Attempts 

The institutional power and the economic stability that China has built up in the past few years has faced challenges in the process to rebalance its economic downturn. Unlike the common struggle of inflation experienced by other countries, such as Russia and Turkey, China precisely looks toward a deflationary spiral. This decline can be observed to be caused by internal and external factors. One internal factor, shaped by the government’s influence, that has played a substantial role in shaping this declining economic dynamic is the inability of companies and individuals to earn maximum profits. Such situation, presumably, stemmed from their focus on minimizing the already mounting debts (TLDR News Global, 2023). Along with that, Palmer (2023) stated that social confidence is the most substantial factor in reviving the sluggish economy as expenditures will ultimately encourage investments and increase the market’s purchasing power.

Unfortunately, even when 80% of the Chinese household savings arise in 2022, people are still hesitant to spend their money. Furthermore, a shrink of productivity caused by excessive youth unemployment has put down a severe setback for economic growth in the long run. The regulatory delimitation of private businesses and private enterprises in 2021 has worsened market competition, thus causing thousands of companies to close down, with one company being reported to lay off up to 60.000 workers (Palmer, 2023). The crisis also knocked down the property market in China due to the lack of buyers’ trust to real estate activity on finishing building, thus they have declined to fulfill the mortgage and affecting the real estate market. 

On the other hand, external factors from other states also play a role in perpetuating the state of China’s sluggish economy. In August 2023, the US banned private equity firms from investing their capital in China’s technology industry under President Joe Biden’s executive order with the intention to uphold the national security of America. Accordingly, China projects drastic outcomes from the Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern. China’s Minister of Commerce, Wang Wentao, predicted the order to negatively impact business operations and disrupt trade order norms and the global economy. With the rising geopolitical tension between them, US investment in China’s technology industry sector has also fallen in the past two years making 2022 the lowest point of US direct investment to China at only US$8.2 billion (Wu, 2023). Besides the action from the US government, Mitsubishi Motors Corporation, a Japanese giant automobile firm, also decided to discontinue their operation in July after the decline of business for years in China. Additionally, the European Union Chamber of Commerce in China,  a non-profit organization that represents the interests of companies from the EU, has announced the findings of its business confidence survey in 2023, revealing that one in ten corporations has transferred their investment out of China (McDonald, 2023). This situation is emphasized by China’s foreign direct investment receipts from April to June had collapsed to only $4.9 billion, down from 87% compared with last year’s period. (Bloomberg, 2023). 

Nonetheless, China has been strategizing its efforts to overcome and stimulate their economic situation. The drastic decline in private sector investment and real estate, as well as immense youth unemployment have urged the People’s Bank of China (PBoC) to take equally drastic monetary measures. The bank has cut down one-year mortgage’s prime rate from 3.55% to 3.45%. They also updated certain regulations to pave the way for enormous foreign capital inflow while reducing the percentage points for bank lending facilities in order to reduce the cost of borrowing. In addition, awareness of the importance of investment also prompted the State Council to declare a paper in August 2023 consisting of six sections and 24 policy measures to attract investment. However, analysts have been hoping for a bigger outcome from the Chinese government because the stock markets in Shanghai and Hong Kong showed a decline of 1.4% and 0.6%, respectively, a few days after the rate cut (Al Jazeera, 2023).