Commentary on Political Economy

Friday 1 March 2024

ONLY FIVE YEARS AGO, PROF. MICHAEL PETTIS AND MY HUMBLE SELF WERE TWO OF THE VERY EXIGUOUS NUMBERS OF ECONOMISTS PROPHESYING THE FALL OF RODENT LAND.

What’s Wrong With China’s Economy, in Eight Charts

Updated March 1, 2024 12:03 am ET

A closed Beijing beauty salon. Chinese consumers who borrowed heavily are cutting back on spending. Photo: Bloomberg News

China’s economy is at a turning point. An old economic model underpinned by heavy investment in infrastructure and real estate is crumbling. Growth is slowing and prices are falling, raising the specter of a Japan-style slide into stagnation.

How did the world’s second-largest economy get into such a mess? These charts lay out what is ailing China’s economy and the challenges it will face for years to come as a result.

Real estate: Growth engine no more 

Real estate used to account for around one-quarter of China’s annual economic output. But a lengthy boom came to a halt in 2020 when the government, fearful of ballooning debt, introduced policies known as the “three red lines” that curtailed property developers’ access to easy credit. The result, made worse by pandemic-era restrictions on daily life and the economy, was a steep drop in home sales, new construction and investment. The engine of growth went into reverse.

Consumer confidence: Down in the dumps 

The real estate slump has deepened a sense of gloom among Chinese consumers, whose optimism about the future of the economy collapsed during the pandemic and hasn’t recovered. Consumers borrowed heavily to finance home purchases and expected bumper gains; now they are responding to the property turmoil by cutting back spending. Although consumption picked up a bit in 2023, it remains well below its prepandemic trend. Faced with weak consumer demand, businesses have resisted investing and hiring—most visible in painfully high youth unemployment

Consumer prices: Deflation nation

A consequence of weak consumption and private-sector investment in China is deflation, which stands in contrast to the inflation that has bedeviled much of the world for the past few years. Consumer prices have been flat or falling for months, and companies have been cutting prices for more than a year. Deflation makes it harder for households and businesses to service their debts, adding further pressure to spending and prices—a downward spiral that can be difficult to get out of. The usual remedy is large-scale government spending, interest-rate cuts and an expansion of the amount of money and credit in the economy. But Chinese officials are reluctant to go all-out on stimulus and risk reinflating a real estate bubble and adding to China’s already-colossal debt pile.

Debt: Tapped out

China’s overall debts have widened to the equivalent of more than 300% of gross domestic product, far in excess of the 253% of GDP the U.S. owes. A chunk of China’s debt is owed by its local governments. Their finances are under growing pressure now that revenue from selling land to property developers—a crucial source of income—has dried up. Real-estate firms account for another sizable chunk of China’s debt. Chinese banks are heavily exposed to both indebted sectors. Faced with weak growth, deflation and property-market turmoil, banks can expect loan losses to mount, which could further pressure growth by strangling the supply of credit to the economy.

Demographics: Fewer workers

Problems long in the making are also beginning to trouble China’s economy. While China’s workforce is still large, the boost to the supply of workers from rapid urbanization is mostly played out. People are having fewer babies and the overall population is shrinking and skewing oldermeaning the pool of workers and consumers in China is set to get smaller. Those changes will make sustaining economic growth harder in future.

Foreign investment: Moving On

As the outlook darkens, foreign investors are taking flight. China recorded inflows of foreign investment into factories, offices and businesses in every quarter since comparable records began in 1998. That run ended in the third quarter of 2023, when China’s balance of payments showed a net outflow of $11.8 billion in direct investment for the first time, as foreign companies either sold out and left or stopped reinvesting the profits they earned in China back into their operations there. Stock and bond investors also pulled money out of the country’s financial markets. The outflows show that China is losing its luster as a destination for foreign investors who once flocked there in anticipation of juicy returns and abundant commercial opportunities.

Trade: Raising barriers

Seeking new avenues for growth, Beijing is pouring money into factories and new industries, especially green technology. With demand weak at home, the result is a growing glut of products that China is seeking to find buyers for overseas. The most conspicuous example is cars, including electric vehicles. China has overtaken Japan as the world’s largest exporter of passenger cars, and Chinese companies such as BYD are seeking to dominate the growing global market for greener forms of transport. But Beijing’s ambition to revive China’s economy by doubling down on manufacturing and exports is meeting stiff resistance, especially in the U.S. and other advanced economies, where governments are tightening restrictions on Chinese imports.

Economic growth: Slowing down

In the past, China was able to respond to economic setbacks by boosting government spending, especially on infrastructure. But these days, China’s need for roads, railways and airports has largely been met, leaving few productive projects to pursue. Another stimulus option for Beijing would be to give more handouts or tax breaks to households, but to top officials such a consumption-focused approach smacks of Western policies they regard as wasteful. With its economic challenges multiplying, and options for stimulus limited, China looks set for much weaker growth in the years ahead.

Write to Jason Douglas at jason.douglas@wsj.com

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