China’s Economic Slowdown: What’s next?

For the past few months, the world has been rattled by the potential signs that China’s economy has been slowing down. Since the lifting of China’s zero COVID policies in late 2022, many assumed it would deliver a wave of consumer demand and boost the global economy. Instead, China has seen a sluggish pandemic recovery with poor consumer demand and an ever-growing housing crisis triggered by the fallout of one of China's largest property developers. Since Deng Xiao Ping’s reform of 1978, China’s economy has become closely interlinked with its real estate sector, which saw a massive expansion in line with rapid population growth. With 70% of household wealth linked to real estate, it became a major way for China’s middle class to store wealth, meaning a major slowdown would have a sizable impact on the wider economy. The property sector also usually accounts for over a quarter of the country’s economic activity, but the years of stringent covid policies have left real estate developers with high debt due to construction delays triggered by developers’ bond defaults and reduced demand. The combination of state infrastructure updates racking up too much debt and house prices decreasing has left households with lower savings, creating a growing sense of economic insecurity for the near future.

Most recently, the looming threat of China’s largest property developer, Country Garden, potentially defaulting on its international debts, has left many worried it would create a much larger fallout than Evergrande. According to the Financial Times, the company was unable to pay their due payment of $60 million USD (HK$ 470 million) earlier this month and stated they “will not be able to meet all of its offshore payment obligations” by their due date. With its September sales falling by 81% compared to the previous year and having 200 billion USD in liabilities (of which 10 billion is in dollar denominated debt), there are fears that the missed payment would prompt the group’s creditors to speed up demand for debt repayment. Country Garden was once regarded as a remarkable example of a real estate firm with fiscal responsibility.

For years now, the Chinese government has sought to shift its economy away from statism and state led investments and export led growth, to one driven by domestic consumer spending. However, the combination of years of brutal zero-covid policies, an ageing population, and state crackdown on companies, has resulted in the level of debt across the real estate sector ballooning. Household consumption as a source of demand was already at low levels before covid but with weak domestic demand in 2023’s second quarter, private sector investment has dwindled and the consumer price index fell in July for the first time in 2 years. Worries of deflation still persist as September’s consumer price index inflation remained at zero and many fear that the economic slowdown may worsen as China will struggle to hit their 5% target growth.

While China has previously weathered through other economic slowdowns and applauded for the effectiveness of their alternative to the Western model of liberal economics and free market, much of their tactics used previously might not work now. As the property bubble seems on the verge of bursting, it is exposing the structural threats to economic stability in China. This stability has now been questioned as China sees an 80% drop in foreign direct investment into the country in the second quarter and capital outflows of 49 billion USD in August. To prevent the exacerbated effects of the slowdown, Chinese banks have cut the interest rates on renminbi deposit rates in an attempt to reduce mortgage rates. However, only the one year rate was cut despite the five year rate being used to price mortgage. Therefore, there are fears that further cuts in the interest rates would cause the yuan to depreciate and even more capital outflows. Unlike the response for the 2008 financial crisis, there has not been any similar stimulus package announced as the government grapples with more debt and a reduced need for large infrastructure projects.

Effects on other markets

The economic slowdown in China will no doubt bring about reverberating effects globally, most notably on economies that are highly reliant on trade with China and perhaps those with deep links to the Belt and Road Initiative. With China being the largest commodity consumer in the world and a source of more than 40% of global economic growth, a weakening Chinese economy would bring a shrinking demand for major goods. The World Bank has already reviewed their growth forecast and downgraded it for both China and developing economies in east Asia and the pacific, signalling a poor economic outlook for Asia. In South Korea, the effects have already been felt with a manufacturing slump which saw exports to China fall 20% in August, leading to the South Korean government announcing 181 trillion won (136 billion USD) in tax breaks and loans for exporters. Similar situations are occuring in other Asian economies, with exports from Taiwan to China and Hong Kong down by 28% compared to previous years. The effect is less prominent in countries with smaller industrial bases and connections to China such as Indonesia and Philippines. 

Another large repercussion of the Chinese economy slowing down is the effect of decreased Chinese tourism in Southeast Asia. Despite China’s borders reopening in January earlier this year, many countries in Southeast Asia that rely heavily on Chinese tourists have yet to see numbers similar to pre-pandemic levels. In Thailand, the number of Chinese tourist arrivals between January and July was only 1.8 million, compared to the 11 million Chinese arrivals they saw in 2019. It is also the case for Cambodia, Laos and Malaysia, where tourism is one of their major exports and where Chinese tourists make up the largest source.

While the effects will be much more prominent in Asian economies, the slowing down of the world’s economic propeller will no doubt also affect other major economies. However, a silver lining for economies like the U.S. or the EU is that a drop in commodity prices from China is helping ease inflation that it is currently battling. These leading market economies are also increasingly shifting their narrative away from high economic dependence on China to one of ‘derisking’. The U.S. has now, since the Trump administration, engaged in economic statecraft that is increasingly emphasising their national security in economic decisions. The years of high GDP growth in China allowed the government to build a foundation of both external power and influence in the economic and political sense. However, with bleak growth forecasts for China and increased protectionist policies from the U.S. and the EU, the current power competition will inevitably be reshaped. This leaves the question as to how China will react to their potentially reduced sway as an economic partner in the global economy.

Political effects 

The question now remains, will the current economic slowdown turn into a genuine political challenge for Xi Jinping? Since the era of Deng Xiaoping’s economic reform and opening up, there has been an unofficial social contract between the the Chinese Communist Party and the Chinese people in which they were given the opportunity to have economic prosperity as long as they accepted the lack of political and civic freedom. However, there is a  new generation that has not experienced the chaos of the few decades following the CCP’s establishment, but instead has mostly seen China’s rise to becoming a global economic powerhouse. With them now facing unprecedented levels of youth unemployment and still feeling the aftermath of the zero covid policies, the so-called Chinese dream now seems further away from their reach. The wave of “White Paper Protests”against the COVID19 lockdowns that rippled through China in December 2022 shows that there is perhaps a shift in perception of the CCP by the young generation.

Not only has the domestic internal perception of the CCP  most likely shifted, but their external perception by the international community has also suffered recently. Xi Jinping’s decade of leadership has now seen vast anti-corruption campaigns, a pivot to ideologies that prioritise national security, and an expansion of China’s influence globally. For years, China’s economic model of statism and authoritarianism that led to its rise was pitched as being an attractive alternative to the West’s model of liberal market economies. However, there now seems to be growing insecurity about the Chinese economy as  COVID19 policies reveal structural problems and Xi Jinping’s increased intervention is chipping away at the confidence of Chinese entrepreneurs and international investors. Additionally, the erosion of Hong Kong’s autonomy as a hub of rule of law, property rights and a free press has exacerbated this sense of security for business stakeholders in China as many firms  operating in China had previously established in Hong Kong to secure legal protections and enjoy asset security. 

Therefore, China’s dwindling growth may lead to Xi Jinping exploring other avenues to bolster the confidence in the CCP. One prominent strategy that comes to mind would be increasing the attention on Taiwan. As reunification with Taiwan has become the ultimate goal for Xi Jinping, it is becoming evident that this will shape the CCP’s national outlook for the next few years. Thus,  the question remains: will the CCP be able to maintain the political-social balance that was sustained by their economic growth despite their economy facing multifaceted pressures, or will Xi be unable to give up his desire to strengthen the party and national security?