China’s Enduring Economic Slowdown
The Chinese government’s reluctance to implement bold consumption stimulus policies continues. Yet, invigorating domestic household spending is crucial for sustainable growth.
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The End of an Economic Boom
The golden era of unbridled Chinese economic growth seems to be in the rearview mirror. In 2007, China boasted an annual economic growth rate exceeding [14 percent](https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CN). Fast forward to 2023, and the rate has dwindled to less than 6 percent. Meanwhile, the country’s total indebtedness surged, reaching over [365 percent of GDP](https://www.iif.com/portals/0/Files/content/Global%20Debt%20Monitor_May2024_vf.pdf) by early 2024.
Collapse or near-collapse of major real estate players, such as Evergrande, further highlights China’s economic challenges. Only a few years ago, these giants symbolized China’s economic marvel.
The Rolle of Past Crises and Policy Adjustments
Over the decades, China has adapted quickly to economic crises, employing policy innovations during tumultuous times. Comparable economic challenges in the past—like the overheating in 1992-93 and the post-1997 Asian financial crisis deflation—witnessed swift recoveries. Yet, the current debacle stands out because it highlights deeper systemic issues rather than mere cyclical downturns.
Extensive previous policy measures, like Zhu Rongji’s 1994 reforms, their 2001 WTO entry, and the financial stimuli of 2009-10, contributed to past recoveries. Some analysts foresaw that China could wave its magic wand once more. Yet, it seems the structural imbalances in their growth engine require more profound and enduring interventions.
Structural Underconsumption: An Ongoing Challenge
In essence, China’s past growth model leaned heavily on bolstering production capacities. Sadly, it neglected domestic consumption. The heady days when China exported its way to prosperity appear numbered. Amidst rising protectionism and overcapacity in key industries, China sorely needs to pivot resources towards internal demand. Economists have long pressed for this reorientation. The transformative potential parallels strategies seen in other Asian economies, like Japan or South Korea, that shifted focus from merely amplifying production.
Demographic Shifts and Economic Realities
China contends with significant demographic changes, which contrast sharply with past economic advantages. For decades, wage competitiveness in manufacturing propelled their growth. Their vast rural populace seemed an infinite source of labor. However, this advantage began waning post-2010. The interplay of stringent one-child policies and shifting demographics means China faces these challenges earlier than its Asian neighbors.
In 2022, China recorded its first population [decline](https://www.npr.org/2023/01/17/1149453055/china-records-1st-population-fall-in-decades-as-births-drop) since the 1961 famine. Unlike Japan or South Korea, which adapted to evolving demographics through industrial upgrades, China’s trajectory appears more complex.
Technological Advancement: Triumphs and Troubles
China’s foray into advanced technology sectors mirrors both its achievements and pitfalls. Innovations such as electric vehicle advancements spotlight successes. However, an over-reliance on imported components and technology blunts their global competitiveness. The high-tech facade often masks substantial dependencies on foreign developments, as seen with products like the [iPhone](https://asia.nikkei.com/Business/Technology/iPhone-15-teardown-reveals-10-costlier-parts-than-2022-flagship).
Despite a significant increase in registered patents, many remain commercially [worthless](https://www.bloomberg.com/news/articles/2018-09-26/china-claims-more-patents-than-any-country-most-are-worthless). Fraudulence and low-quality innovations plague the system. Without robust intellectual property protections, the ambition to upgrade economically remains hindered. As a result, investments often lead to inefficiencies rather than genuine innovation.
Challenges of Promoting Consumption
Chinese growth, heavily reliant on labor and capital expansion, continues to miss the mark. Absence of reforms akin to those seen in other Asian powerhouses amplifies this disparity. Across the globe, as populations age, there’s often an increased savings tendency. Their robust welfare systems helped offset consumption declines, unlike China’s limited welfare expansion. Consequently, Chinese households increasingly rely on personal savings for essentials.
The demographic drag further suppresses consumption amid insufficient public welfare safety nets. This situation leaves the Chinese economy vulnerable, increasingly tethered to dwindling exports and foreign investment.
The Stark Choices Ahead
Beijing faces a critical choice between economic revival and retaining stringent control over society. Real economic rejuvenation demands reforms possibly jeopardizing the party-state’s control. Consequently, leadership might prioritise securitising their regime, despite foreseeable economic deterioration. Other autocratic regimes, like Russia or Iran, have survived by using similar tactics, ensuring the state’s supremacy remains untouched.
Extrapolating past trends, unless China restructures its growth model, economic woes may become its new normal.
**Ho-fung Hung**, the author of this analysis, holds distinguished academic titles. His expertise offers invaluable insights into China’s multifaceted economic challenges.
