China's economy is facing multiple challenges including sluggish consumer spending, a crisis in the property market, weakening exports, record youth unemployment, and high local government debt. These issues are starting to impact the global economy, and there are concerns that China may experience a Japan-style economic malaise. President Xi Jinping's government has limited options to fix the problems, and their usual playbook of large-scale stimulus has led to oversupply and high debt.
It was meant to be the year China’s economy, unshackled from the world’s strictest Covid-19 controls, roared back to help power global growth. Instead, halfway through 2023, it’s facing a confluence of problems: Sluggish consumer spending, a crisisridden property market, flagging exports, record youth unemployment and towering local government debt. The impact of these strains is starting to reverberate around the globe, impacting everything from commodity prices to equity markets. The risk of Fed hikes tipping the US into recession has also heightened the prospect of a simultaneous slump in the world's two economic powerhouses. What's worse, President Xi Jinping’s government doesn’t have great options to fix things. Beijing’s typical playbook of using large-scale stimulus to boost demand has led to massive oversupply in property and industry, and surging debt levels among local governments. That’s sparked a discussion about whether China is headed for a Japan-style malaise after 30 years of unprecedented economic growth. Exacerbating this is Xi’s more assertive approach to dealing with the US, which has added fuel to American efforts to cut China off from supplies of advanced semiconductors and other technologies set to drive economic growth in the future. Altogether, the dynamics threaten not only to lead to disappointing growth this year, but also to thwart the Chinese economy’s momentum to surpass that of the US.
“A few years ago, it was difficult to imagine China not rapidly overtaking the US as the world's biggest economy,” said Tom Orlik, chief economist for Bloomberg Economics. “Now, that geopolitical moment will almost certainly be delayed, and it's possible to imagine scenarios where it doesn't happen at all.” In a downside scenario — with a sharper property slump, slow pace of reforms and more dramatic US-China decoupling — Bloomberg Economics sees China’s growth decelerating to 3% by 2030. Base Effect China’s $18 trillion economy is struggling across a range of sectors. Data released Friday showed the economy lost more steam in June, as manufacturing activity contracted again and other sectors failed to build momentum. In the debt-strapped southwestern province of Guizhou, officials are seeking bailouts from Beijing. In the manufacturing hub of Yiwu in coastal Zhejiang province, small businesses say sales are down substantially from 2021 levels. Over in the city of Hangzhou, the home of e-commerce giant Alibaba Group Holding Ltd., a government regulatory crackdown on the tech sector and tens of thousands of layoffs are now affecting the property market. China’s official growth target of around 5%, which was deemed unambitious when it was announced in March, now looks more realistic. Goldman Sachs Group Inc. in June cut its forecast for China’s growth this year to 5.4% from 6%. At first sight, in a world economy expected to grow a meager 2.8%, that doesn't look too shabby. The reality, though, is that with China still under Covid rules in 2022, a low base for comparison is flattering the headline. Netting out the base effect, growth for 2023 will look closer to 3% — less than half the prepandemic average, Bloomberg Economics said.
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