Why should anyone worry about the consequences of an economic slowdown in China when its economy grew by 6.3 per cent in the second quarter of this year? The first reason is that this growth was slower than expected, especially when one accounts for the low base in 2022 when some Chinese cities like Shanghai were still in lockdown. Currently, China’s GDP annual growth for 2023 is forecast to be a mere 3.2 per cent, a disappointing result for a country that consistently achieved double-figure growth rates up to some years ago.
US President Joe Biden, who is at loggerheads with China over issues like Taiwan, called China’s economy a “ticking time bomb”. Biden argues, “That is not good because when bad folks have problems, they do bad things.” Some economic experts ask why China’s leaders’ response to increasing signs of economic distress is so tepid.
The signs of economic distress in China are very evident. China delayed phasing out COVID restrictions for much longer than most other countries. This year was meant to be when China’s economy would roar back to help energise global economic growth. Instead, the second largest global economic power faces a crisis of confidence with sluggish consumer spending, a shaky property market, falling exports partly caused by a US drive for “de-risking” the trade globalisation model, a local government debt mountain and record youth unemployment.
China’s economic problems are bad news to most other countries that depend on trade for growing their own economies. Hundreds of millions of the world’s jobs and production depend on China, with its extensive market and factory floors.
The IMF forecast that China will contribute to 23 per cent of the global economic growth over the next five years. Trade with China impacts businesses worldwide, from exports of minerals and food commodities to manufacturing technology products and consumer goods.
The growing trend of Chinese tourism, especially to Europe, is also slowing down as Chinese travellers have yet to resume travelling en masse abroad, as their income and job confidence falters.
At the beginning of 2023, analysts’ optimism was high. They forecast that China would rapidly recover consumer spending, fuelled by revenge shopping after years of COVID restrictions, eating out and travel. Today, many Chinese families fret about weaker growth, rising unemployment and a fall in incomes, and the negative wealth effect from a slumping property sector as people fear their homes are worth less. Youth unemployment has now reached 21 per cent.
Hundreds of millions of the world’s jobs and production depend on China, with its extensive market and factory floors
There are lessons to learn from how the Chinese leaders are handling this worsening economic situation. China watchers believe President Xi Jinping’s focus on national security is restricting and countering the economic effort to revive the economy. Indeed, the focus on security may be scaring off the money Beijing needs.
Some analysts believe that the Communist Party has an ingrained hesitancy towards measures that could shift power from the state to the private sector. They also blame the government stacked with Xi’s loyalists, preventing a meaningful policy debate on how best to address the current economic challenges. Loyalists in key management positions are unsure of what the leadership wants them to do. They put off any action until they receive instructions from above. Put simply, the result is policy inertia that aggravates economic risks.
While independent analysts broadly agree that China needs measures to boost consumption and business confidence, such as tax cuts, many in the country’s political leadership are in denial about the current severe economic problems.
Wang Wenbin, a China foreign ministry spokesperson, is quoted by Reuters saying: “A small number of Western politicians and media amplify and hype up the temporary problems existing in China’s economic recovery. They will eventually be slapped in the face by reality.”
Like some other leaders in Western economies that fail to acknowledge the risks threatening their future prosperity, China’s leaders deny the significant perception gap between what the government believes is the state of the economy and what businesses and ordinary people are experiencing in reality.
There are often fundamental political reasons when leaders fail to act decisively to address serious economic challenges. Xu Chenggang is a scholar at Stanford University. He argues: “A perennial fear of the Chinese Community Party is that it could be overthrown if capitalism and the private economy grow strong enough.”
Ultimately, one must never underestimate the indomitable survival instinct of politicians who care less about strengthening the economies they lead as long as they prolong their relevance on the political stage.