China’s economy in 2023 is hardly in great shape. Major property developers are teetering. Youth unemployment is so high that Beijing is hiding the data. And exports and the value of the Chinese currency, the RMB, are declining. Among Chinese consumers and investors, confidence in the economy is low.
What does this slowdown mean for China, and the rest of us?
Why did China’s economy falter?
If you’ve been under a particularly large rock, wondering how to pick up the pieces of your fantasy football team after a crushing defeat, or just dealing with a torrent of email as the fall semester starts, you might be a bit confused by news headlines and algorithm-chasing YouTube videos about China’s economic collapse. Wait – wasn’t China set to rebound this year after the end of zero-covid, like other countries did when shifting to a “post-covid” posture? What’s happening?
To be clear, the Chinese economy isn’t collapsing. But China is dealing with a problematic real estate sector and the aftershocks of the nation’s peculiar covid experience.
First, the underlying problem that China is dealing with is an over-reliance on real estate investment to power its economic engine. As I detail in my recent book, the Chinese political system for decades rewarded officials for producing strong growth numbers. This development focus was quite successful, bringing China to its current position as the factory of the world and second-largest economy – though over time more and more problems accumulated, including debt, corruption, pollution, and falsification.
Specifically, as Yeling Tan and James Conran argue in their contribution to the important new volume Diminishing Returns, we can think of China operating with two growth models: exports and investment. China’s current troubles are mostly connected to efforts to shift away from real estate investment as a growth driver.
To be clear, the proximate cause is self-inflicted. General Secretary Xi Jinping instituted policies – called the “three red lines” – to limit the debt that property developers could take on. In effect, the policies have led to multiple developers – most famously Evergrande and currently Country Garden – to collapse, unable to pay off their massive interest bills. Yet rather than changing course by firing the “bazooka” of fiscal stimulus as it had in prior moments of concern in the real estate sector, the Chinese government appears prepared to follow through and actually deal with slower growth for a turn while the economy digests some of these problems.
Zero-covid left Chinese less eager to spend
Second, it’s important to remember how China’s covid economy was quite different from the experience elsewhere. While the pandemic began in China, after the first few months of 2020, the country’s focus on zero-covid and strict quarantining of international visitors was successful in stamping out the virus domestically. While the rest of the world suffered deeply in the grips of the early pandemic, Chinese factories ran fast to make the goods that global consumers, stuck in a new WFH reality, wanted to purchase.
But the increased transmissibility of the omicron variant – and Shanghai’s catastrophic month-long quarantine in mid-2022 – finally ended China’s single-minded pursuit of minimizing case counts. By November 2022, after Xi’s reappointment to a third five-year term, the country was at a breaking point as the costs of virus suppression were becoming as unbearable as the predicted wave of infections that would come when the restrictions were lifted. Protests raged – including several demonstrations that targeted Xi Jinping personally – in a number of cities. And like that, the restrictions were gone.
What happened in China is not what markets had dreamed of: trillions of unspent funds flooding corporate coffers. Instead, concerns about real estate values and individual income insecurity have led many Chinese to simply hold on to much of their pandemic savings. Debates about the balance of those factors in the current slowdown continue.
What’s next?
Given that China is not going back to the stimulus plans it relied on in the past, how is the government going to right the economy? China’s other growth engine – exports – is a key piece, but how will that play out amidst U.S. technology restrictions?
The Chinese RMB has been in the doldrums, reaching lows not seen since the 2008 global financial crisis. In theory, depreciation of the RMB should make Chinese-made goods appear cheaper and thus more enticing to foreign consumers. However, total export statistics indicate weakness, so the real story requires unpacking the totals to look at how different sectors are faring. The U.S. has been increasingly tightening the screws on its technological restrictions with China, leading to massive declines in exports in categories such as integrated circuits and computers. Compounding these declines are troubles in steel, clothing, and other sectors that are directly affected by weak demand abroad.
However, one incredibly important sector – automotives – is bucking this downward trend. China has become the world’s largest auto exporter in rapid fashion, overtaking Germany and Japan. Chinese firms have zoomed ahead in the race to electrify their fleets and are selling their products at low price points. Concerns about Chinese electric vehicle firms seizing market share in Europe is leading to serious pushback, including a call from European Commission President Ursula von der Leyen for an investigation into fair trade practices.
While the Chinese real estate sector remains battered, the data coming out of the country over the past few weeks confirm that no collapse is imminent, even if a slowdown has taken place. Politically, scholarship including the various chapters in Economic Shocks and Authoritarian Stability finds that strong single-party regimes like China’s tend to endure economic shocks, though Victor Shih’s section about China suggested that it may be entering “a period of brittle rule.”
There may be some temptation, perhaps especially in Washington, to see an opponent vanquished and the opportunity to crow about U.S. dominance. But it’s difficult to think about the challenges facing the planet – *cough* climate change *cough* – without acknowledging Chinese centrality in the clean tech industries of the future: solar, wind, batteries, and EVs.
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