The Uncertain Future of China’s Economy Poses Global Risks

China’s Sputtering Engine of Development

For more than a quarter-century, China has symbolized unyielding growth and upward mobility. With the rise of its 1.4 billion population’s demand for global products, such as Hollywood movies and South Korean electronics, China drove the global economy with its seemingly endless drive for development.

However, this once unstoppable engine is now stuttering, presenting alarming risks for Chinese households and economies worldwide. China, previously seen as the primary driver of profitable globalization, has become the ultimate wild card in a time of unprecedented uncertainty for the world economy.

Amplified Risks and Recent Developments

Recent events have magnified the risks associated with China’s economic slowdown. First, it was revealed that China’s economy experienced a significant slowdown in the spring, dashing hopes of a robust expansion following the easing of strict Covid restrictions.

In addition, data shows that China’s exports have declined for three consecutive months, while imports have dropped for five months in a row, indicating dwindling prospects. Prices of various goods, from food to apartments, have also fallen, suggesting the possibility of deflation and reduced commercial activity.

Furthermore, a major real estate developer, Country Garden, missed bond payments and estimated losses of up to $7.6 billion in the first half of the year, signaling distress in China’s housing market.

The Impact on Chinese Workers and Global Economy

These events spell trouble for Chinese workers and households and have global implications. A weakened Chinese economy reduces demand for major goods worldwide, such as Brazilian soybeans, American beef, and luxury goods from Italy. It also signifies a decreased appetite for oil, minerals, and other industrial essentials.

“The slowdown in China is definitely going to weigh on the global economic outlook,” says Larry Hu, Macquarie’s chief China economist. China has been responsible for over 40% of global economic growth in the past decade, compared to 22% from the United States.

Limited Options and Transition Challenges

An additional cause for concern is the perception of limited options available to Chinese authorities to revive the economy, given the mounting debts amounting to 282% of national output. The government has proposed spending programs to stimulate consumer spending and business investments, but the details remain unclear, leaving local governments burdened with potential liabilities.

China’s ruling Communist Party aims to transition from an economy reliant on state-directed investments and exports to one driven by domestic consumer spending. However, this transition has been impeded by the pandemic, as the government implemented strict restrictions on businesses and movement, hindering the anticipated boost to consumer spending.

Consumer Faith and Economic Outlook

The erosion of public faith in China’s economy is evident through increased savings, weak investment, and low consumer spending. Chinese households, known for their high savings rates due to meager social safety nets, have seen total household deposits expand significantly in the first half of this year.

The uncertainty surrounding real estate, with overinvestment leading to empty apartment blocks and plummeting prices, has contributed to the cautious approach towards spending. China strives to avoid deflation, which could undermine incentives to spend, expand businesses, or hire workers and lead to a decline in society as a whole.

Pivoting Towards Domestic Demand and Challenges Ahead

Despite the challenges, there are signs of a shift in the government’s approach. Private entrepreneurs, previously targeted by regulations, are now being viewed in a more pro-growth, pro-business manner. The government aims to boost domestic demand and oversee a gradual economic slowdown, promoting a transition to services-oriented jobs while mitigating real estate losses.

However, challenges persist, including the relocation of factory work away from China, potential wage decreases, and declining household wealth. The loss of faith among large segments of the population could lead to further turbulence for China’s controlled economy.

Sources: The New York Times