Dr. Mohammad Salami‏‏

From 1978 onwards, China’s economy enjoyed a long golden age. With 18 trillion dollars in wealth and an unprecedented 10 percent growth, China’s economy quickly outpaced Japan’s in 2010 and the Eurozone’s in 2018, and now ranks second only to the US.However, Chinese economic growth has slowed in recent years, especially under Xi Jinping’s government. In 2022, the economy grew by only 3 percent. China’s current economic problems include a declining housing market, lower consumer spending, rising unemployment, and negative inflation. Further challenges stem from its geopolitical rivalry with the US and shrinking population. As a result, the Chinese government has had to develop measures to grapple with declining growth and weakening credit.On 5 March, 2024, at the opening session of the National People’s Congress, Chinese Premier Li Qiang <a href="https://www.reuters.com/world/china/china-targets-2024-gdp-growth-around-5-government-work-report-2024-03-05/" rel="noopener noreferrer" target="_blank">announced</a> that his government aimed to achieve 5 percent economic growth this year. However, many see these economic goals as overly ambitious and feel that Beijing’s current measures will only provide a short-term stimulus for the economyAs a result of China’s vast markets and manufacturing industry, the global outlook for employment and production is significantly linked to China’s economy. In other words, any economic shock in China has an immediate global impact. Beijing is the <a href="https://www.spglobal.com/en/enterprise/geopolitical-risk/global-economy-in-china/#:~:text=China's%20economy%20%2D%20Global%20impact,world's%20goods%20imports%20in%202022." rel="noopener noreferrer" target="_blank">second-largest</a> importer of goods in the world, and accounted for nearly 11 percent of global goods imports in 2022. As Chinese demand decreases, there will be severe repercussions for the economies of exporting countries especially in the Middle East, which supplies about half of China’s oil.China’s economy does not look promising at the moment. In November 2023, the International Monetary Fund (IMF) projected that China’s growth rate would slow to 5.4 percent that year, decrease further to 4.6 percent in 2024, and fall to 3.5 percent in the medium term over the next several years. In addition, flight of foreign capital from China <a href="https://bizbeat.nus.edu.sg/thought-leadership/article/chinas-capital-flight-international-investors-journey-back-to-the-west/" rel="noopener noreferrer" target="_blank">reached</a> 75 billion dollars last September, further exacerbating the country’s economic situation.These challenges <a href="https://asia.nikkei.com/Economy/China-real-estate-crash-would-threaten-goal-of-doubling-GDP-report" rel="noopener noreferrer" target="_blank">could hamper</a> Xi Jinping’s goal of doubling China’s nominal GDP by 2035 to bring its nominal GDP per capita to the level of moderately-developed countries (between $20,000 and $30,000 per capita). The most significant obstacles China faces going forward are its housing crisis, unemployment, lower consumer spending, an aging population, and negative inflation.The instability of the Chinese housing market is a key issue because global confidence in China has been shaken. The housing market accounts for 20 percent of the Chinese economy. For many years, Chinese families believed that housing was the best and most stable investment, but this seems to have been an illusion.In 2023, China’s housing sales <a href="https://www.nytimes.com/2024/01/30/business/china-evergrande-real-estate.html" rel="noopener noreferrer" target="_blank">fell</a> by 6.5 percent. In December 2023, sales were down 17.1 percent from a year earlier, while real estate development was 9.6 percent below the previous year. It is estimated that there are still 20 million units of presold homes that remain unfinished and would require $450 billion in funding to complete.Negative inflation is another crisis that has exacerbated China’s economic difficulties. In January 2024, the price of consumer goods in China <a href="https://www.bbc.com/persian/articles/c3gjq0e0n0po#:~:text=%D8%AF%D9%88%D9%84%D8%AA%20%DA%86%DB%8C%D9%86%20%DA%AF%D9%81%D8%AA%D9%87%20%D8%A7%D8%B3%D8%AA%20%D8%A8%D8%B1%D8%A7%DB%8C,%D8%B1%D9%88%D8%B2%20%D8%B3%D9%87%20%D8%B4%D9%86%D8%A8%D9%87%20%D8%A7%D8%B9%D9%84%D8%A7%D9%85%20%DA%A9%D8%B1%D8%AF." rel="noopener noreferrer" target="_blank">fell</a> at their fastest rate in nearly 15 years. This marked the the fourth consecutive month of rapidly dropping prices as well as the sharpest drop since the September 2009 global economic crisis. Negative inflation is particularly concerning because it leads people to postpone larger purchases such as cars or washing machines in the hope that prices will fall further. As a result, demand stagnates and prices drop further as consumers refrain from buying.In the long run, China’s biggest economic problem might be its aging and shrinking population, since the growth potential of the economy is directly linked to having a young workforce.According to the Chinese government, the country’s population will <a href="https://economictimes.indiatimes.com/news/economy/indicators/what-makes-indias-rise-and-chinas-fall-inevitable-shifting-numbers/articleshow/106963851.cms?utm_source=contentofinterest&amp;utm_medium=text&amp;utm_campaign=cppst" rel="noopener noreferrer" target="_blank">fall</a> by 2 million people in 2023, marking the second consecutive annual decline. Reports also indicate that the number of marriages in China has decreased for nine consecutive years, falling by half in less than a decade. In 2022, only about 6.8 million couples registered for marriage—the lowest number since record-keeping began in 1986. This was down from 13.5 million marriages registered in 2013.China’s economic situation today is the result of several years of worsening structural problems. Officials are trying to revitalize the economy through stimulus packages and injecting resources, but most of these difficulties stem from a structural decline in productivity and income growth. China was previously able to revive its economy during the 2008-9 global financial crisis because its former leaders took a different approach to these challenges that current leaders are.In 2009, former Chinese President Hu Jintao <a href="https://www.cnn.com/2023/12/27/economy/china-economy-challenges-2024-intl-hnk/index.html" rel="noopener noreferrer" target="_blank">flooded</a> the economy with liquidity. However, after Xi Jinping came to power in 2012, his government was reluctant to rein in borrowing, which caused structural problems to become more entrenched. The current slowdown in China’s economy is driven by the end of an unprecedented expansion in credit and investment over the past decade.Structural problems in the housing sector are also of major concern. A total of 70 percent of the wealth of Chinese households is tied up in real estate, and a crisis in that sector will have implications for society as a whole.These difficulties can be traced back to the 2008-9 financial crisis, which <a href="https://econofact.org/what-explains-chinas-economic-slowdown#:~:text=The%20centralization%20of%20power%20has,worsening%20relationship%20with%20the%20West." rel="noopener noreferrer" target="_blank">undermined</a> China’s confidence in the Western financial system and led local governments in China to become more involved in the nation’s economy. Since 2008, local governments have been allowed to borrow using financial bonds and have gradually become competitors to the private sector.To provide collateral, local governments have sometimes sold land. After the tax revenue-sharing reform of 1994, local governments’ share of tax revenues <a href="https://eastasiaforum.org/2023/11/03/chinas-local-government-credit-dilemma/#:~:text=By%20the%20end%20of%202022,balance%20exceeding%20US%2413%20trillion." rel="noopener noreferrer" target="_blank">decreased</a> significantly. As a result, these local governments became increasingly reliant on non-budgetary revenue, particularly land use right transactions. As local governments sold land for loans, they created more land supply but also drove up municipal debt, which some now estimate to be over $13 trillion USD.Similar structural problems can also be seen in the private sector. The Chinese approach, particularly under President Xi Jinping, has been flawed in the way in which it <a href="https://www.gisreportsonline.com/r/china-xiconomics-bankrupt/" rel="noopener noreferrer" target="_blank">discriminates</a> against private businesses in favor of state-owned enterprises (SOEs). Private companies are the largest contributors to the GDP, employment, and exports in China, but Xi Jinping remains convinced that SOEs are the "pillars of socialism." This is why the Chinese government has invested so much in SOEs through credit and subsidies. As a result of discrimination against private companies, including a crackdown on academic tutoring and university counseling sectors, unemployment has risen dramatically in China. This in turn has led to reduced incomes, problems with inflation, and erosion of trust in the government.China is trying to <a href="https://www.aljazeera.com/economy/2024/3/5/china-sets-5-percent-growth-target-for-2024-amid-economic-headwinds#:~:text=%E2%80%9CThe%20'around%205%20percent',Hong%20Kong%2C%20told%20Al%20Jazeera." rel="noopener noreferrer" target="_blank">solve</a> the problems that lie ahead by "transforming the growth model," including through tax reform, fostering talent in the tech industry, boosting domestic consumption, removing barriers to private investment, and issuing 1 trillion yuan ($139 billion USD) in special government bonds. However, it remains to be seen whether China can overcome its economic difficulties in the way that Japan recovered from its "lost decade" of the 1990s. In Japan’s case, the challenges began with the collapse of the asset price bubble.

How is China Navigating its Economic Challenges?