Five reasons why China’s economy is in trouble

China’s economy is slowing down as it adapts to a punishing zero-Covid strategy and weakening global demand.

Official growth figures for the July to September quarter are expected soon – if the world’s second-largest economy contracts, that increases chances of a global recession. Beijing’s goal – an annual growth rate of 5.5% – is now out of reach although officials have downplayed the need to meet the target. China narrowly avoided contraction in the April to June quarter. This year, some economists do not expect any growth.

The country might not be battling steep inflation like the US and the UK, but it has other problems – the factory of the world has suddenly found fewer customers for its products both domestically and internationally. Trade tensions between China and major economies such as the US are also hampering growth.

And the yuan is on course for its worst year in decades as it plummets against the US dollar. A weak currency spooks investors, fuelling uncertainty in financial markets. It also makes it difficult for the central bank to pump money into the economy.

All of this is happening at a time when the stakes are especially high for President Xi Jinping – he is expected to secure an unprecedented third term at the Communist Party Congress (CPC) which begins on 16 October.

So what exactly has gone wrong?

1. Zero Covid is wreaking havoc

Covid outbreaks in several cities, including manufacturing hubs like Shenzhen and Tianjin, have been hurting economic activity across industries.

People are also not spending money on things like food and beverages, retail or tourism, putting major services under pressure.

On the manufacturing side, factory activity appears to have climbed back up in September, according to the National Bureau of Statistics.

The rebound could be because the government is spending more on infrastructure.

But it came after two months in which manufacturing did not expand. And it has raised questions, especially since a private survey showed that factory activity actually fell in September, with demand hitting output, new orders and employment.

Demand in countries like the US has declined too because of higher interest rates, inflation and the war in Ukraine.

Experts agree that Beijing could do more to stimulate the economy, but there is little reason in doing so until zero Covid ends.

“There is not a lot of point in pumping money into our economy if businesses cannot expand or people cannot spend the money,” said Louis Kuijs, chief Asia economist at S&P Global Ratings.

2. Beijing isn’t doing enough

Beijing has stepped in – in August it announced a 1 trillion yuan ($203bn; £180bn) plan to boost small businesses, infrastructure and real estate.

But officials can do a lot more to trigger spending to meet growth targets and create jobs.

Chinese President Xi Jinping waves after speaking during a ceremony to honour contributions to the Beijing 2022 Winter Olympics and Paralympics at the Great Hall of the People on April 8, 2022 in Beijing, China.IMAGE SOURCE,GETTY IMAGES
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President Xi has personally pushed for the zero Covid strategy

This includes investing more in infrastructure, easing borrowing conditions for home buyers, property developers and local government, and tax breaks for households.

“The response of the government to the weakness in the economy has been quite modest compared to what we have seen during previous economic bouts of weakness,” Mr Kuijs said.

3. China’s property market is in crisis

Weak real estate activity and negative sentiment in the housing sector has undoubtedly slowed growth.

This has hit the economy hard because property and other industries that contribute to it account for up to a third of China’s Gross Domestic Product (GDP).

“When confidence is weak in the housing market, it makes people feel unsure about the overall economic situation,” Mr Kuijs said.

Home buyers have been refusing to make mortgage payments on unfinished buildings and some doubt their houses will ever be completed. Demand is down for new homes and that has reduced the need for imports of commodities used in construction.

Despite Beijing’s efforts to prop up the real estate market, home prices in dozens of cities have declined by more than 20% this year.

With property developers under pressure, analysts say authorities might have to do far more to restore confidence in the real estate market.

4. Climate change is making matters worse

Extreme weather is starting to have a lasting impact on China’s industries.

A severe heatwave, followed by a drought, hit the south-western province of Sichuan and the city of Chongqing in the central belt in August.

As the demand for air conditioning spiked, it overwhelmed the electricity grid in a region that almost entirely relies on hydropower.

Factories, including major manufacturers like iPhone maker Foxconn and Tesla, were forced to cut hours or shut altogether.

China’s Statistics bureau said in August that profits in the iron and steel industry alone were down by more than 80% in the first seven months of 2022, compared to the same period last year.

Beijing eventually came to the rescue with tens of billions of dollars to support energy companies and farmers.

5. China’s tech titans are losing investors

A regulatory crackdown on China’s tech titans – which has already lasted two years – is not helping.

Tencent and Alibaba reported their first drop in revenue in the most recent quarter – Tencent’s profits fell by 50%, while Alibaba’s net income fell by half.

A residential housing site under construction in Nanjing, Jiangsu Province, China, Sept 1, 2022.IMAGE SOURCE,GETTY IMAGES
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The crisis in China’s real estate market is severely hurting growth

Tens of thousands of young workers have lost work – adding to a jobs crisis where one in five people aged 16 to 24 are unemployed. This could hurt China’s productivity and growth in the long run.

Investors are also sensing a shift in Beijing – some of China’s most successful private companies have come under greater scrutiny as Mr Xi’s grip on power grows.

As state-owned companies appear to be gaining favour, foreign investors are taking money off the table.

Japan’s Softbank pulled out a huge amount of cash from Alibaba, while Warren Buffet’s Berkshire Hathaway is selling its stake in electric vehicle maker BYD. Tencent has had more than $7bn worth of investments withdrawn in the second half of this year alone.

And the US is cracking down on Chinese companies listed on the American stock market.

“Some investment decisions are being postponed, and some foreign companies are seeking to expand production in other countries,” S&P Global Ratings said in a recent note.

The world is becoming accustomed to the fact that Beijing may not be as open for business as it used to be – but Mr Xi is risking the economic success that has powered China in recent decades.

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