China narrowly exceeded its economic growth target of 5% last year, one of the lowest indicators in decades. Looking ahead, analysts expect the economy to face strong headwinds in the Year of the Dragon.
Foreign investors are exiting Chinese stocks at a record pace amid a crisis-hit real estate market, weak export earnings and a crackdown on private industry.
Amid weak business confidence, economists broadly agree that the Chinese government needs to develop policies to stimulate domestic consumption growth.
But while some analysts have called for drastic measures to shake up China’s economy, expectations have been tempered by Beijing’s longstanding aversion to large-scale social spending.
Looking beyond the current challenges, some analysts see reason for optimism.
China has been in the longest period of deflation since the 2008 global financial crisis. Consumer prices fell for the fourth consecutive month in January, and the decline is likely to continue into 2024.
Kevin P. Gallagher, director of the Center for Global Development Policy at Boston University, told Al Jazeera, “Even if coronavirus restrictions are lifted at the end of 2022, China will not see the economic recovery that most people expected.” I couldn’t see it,” he said.
“Authorities are now acutely aware of the threat of falling prices.”
If households and businesses postpone purchases in the hope that goods will continue to become cheaper, there is a risk that falling prices will become a self-reinforcing cycle.
Deflation also puts pressure on debtors, as the real cost of borrowed money rises.
In China, the ratio of debt to gross domestic product (GDP), including local government debt, will reach 110% in 2022, making this an increasingly vexing issue for policymakers.
In recent months, authorities have stepped up support measures to stem the fall in prices, cutting mortgage interest rates on home purchases and allowing banks to shrink their cash reserves to encourage more lending.
Much of China’s deflation crisis is due to the woes of the real estate sector, which accounts for 20-30% of GDP.
After the 2008 global financial crisis, local governments encouraged a debt-fueled construction boom to spur growth. However, after decades of rapid urbanization, the supply of housing exceeded demand.
New home sales in China fell by 10 to 15 percent last year, according to Fitch Ratings, due to several high-profile developer defaults, including the collapse of Evergrande Group.
As a result, Chinese households are cautious about spending, especially on real estate, but the weak social safety net encourages families to save for emergencies.
In 2022, household consumption accounted for only 38% of China’s GDP.
By comparison, private spending accounted for 68% of GDP in the United States in the same year.
“Households have depleted their savings during the pandemic,” Sina Yue, China economist at Capital Economics, told Al Jazeera. She added: “The real estate crash has further eroded consumer confidence. China also has an aging population, and spending typically declines with age.”
As a result, gross national savings in 2023 exceeded 40%, more than double the US level.
“Looking ahead, getting people to spend their savings will not be easy. For decades, economists have urged governments to rebalance the economy in favor of consumption and away from investment. We have been encouraging it,” Yue said.
China’s investment rate, which accounts for 42% of GDP, is lower than that of other emerging countries, let alone developed countries, which average 18-20%. In addition to housing stock, Beijing is investing heavily in roads, bridges, and railways.
But just like with housing, years of overinvestment have created surplus capacity. For example, China Railway’s revenues are always less than its costs. At the end of 2022, the government-backed agency had debts of 6.11 trillion yuan ($886 billion).
“We are witnessing the limits of China’s capital-intensive infrastructure model,” Yue said.
“And given that interest rates are already quite low, the Chinese government will need to start stimulating consumption to generate high and stable growth.”
Yue said policymakers should remove incentives to hoard savings by increasing spending on education, health care and pensions.
Analysts expect China’s rubber-stamp parliament, the National People’s Congress, to set an annual growth target of about 5% again at its March meeting.
While many economists have encouraged the Chinese government to stimulate growth through household remittances, Victor Shi, a China economics expert at the University of California, San Diego, believes investment-led growth will continue to be influential. I predict that.
“Marxist ideology, which emphasizes industrial production, remains the fundamental basis of Beijing’s policy-making,” Shi told Al Jazeera.
“Governments will probably continue to subsidize manufacturing. In contrast, consumption will be seen as a luxury.”
“There are 1.4 billion people in China, so comprehensive social assistance would be very expensive, especially in a deflationary situation,” Shi added.
Shi said that while the Chinese government could increase household consumption by encouraging companies to raise wages, “China’s manufacturing advantage is partly based on suppressed worker incomes.” Stated.
Therefore, “increasing wages will hurt China’s exports, which are an important source of production,” he said.
“I don’t think the government will change its budget priorities in favor of the Chinese people…The result is likely to be an economic downturn for some time.”
Separately, Beijing has other strategic priorities, said Gary Ng, senior Asia Pacific economist at Natixis in Hong Kong.
“President Xi [Jinping] “Ng seems more intent on optimizing the economy for security and resilience than stimulating rapid growth,” Ng told Al Jazeera.
In recent years, Beijing has invested heavily in strategic industries such as artificial intelligence and advanced computer chips.
By shaping industrial policy based on national security, the Chinese government has set its sights on reducing dependence on foreign technology and supporting its long-term geopolitical ambitions.
At the same time, Ng said, “Beijing has shown a new willingness to invest in more consumer-oriented technology areas, such as renewable energy and electric vehicles.”
“Unlike real estate, these industries have the ability to create jobs and promote economic self-sufficiency,” he says.
Ng also stressed that economic transformation takes time and there is “no silver bullet for lightning-fast growth.”
“Investments in high-tech fields should slowly reform China’s economic base,” he said. “Incidentally, personal consumption is already on the rise.”
Boston University’s Gallagher said China’s economic growth trajectory is healthier than sometimes portrayed.
“China’s economic development since the 1990s is often forgotten. Although recent growth has slowed from high levels, it was still 5.2% last year,” Gallagher said. “The outlook for this year is similarly strong.”
“Hawks have been predicting the end of China’s growth model for decades,” Gallagher added. “However, it is true that to build on China’s impressive success, the Chinese government must shed its timidity on the investment and consumption axis.”
Mr Gallagher said 2024 would highlight the urgency for reform.
“if [US presidential candidate] If Donald Trump is re-elected and chooses to engage in a new trade war, Beijing will likely want to become more independent. The Year of the Dragon could be an ideal year for China to step up efforts to stimulate domestic consumption. ”