New Delhi: China is facing a host of economic troubles — consumer prices have declined for the first time in more than two years, exports are down and one of its largest private property developers is reportedly facing a liquidity crisis.
The reasons behind this are plenty, experts told ThePrint, ranging from political decisions taken in the past, to a growing debt burden, weak consumer confidence, an ailing real estate market and an ongoing trade war with the US.
Sriparna Pathak, an associate professor of Chinese Studies at O.P. Jindal Global University, said the Chinese economy has been struggling due to a loss in consumer confidence, and lower consumption has led to its economy tipping into deflation.
“Consumers want to save for a rainy day given the lack of confidence in the economy. There are multiple reasons behind this but the immediate reason is the three-year Covid lockdown that was enforced by the Chinese government,” she added.
The Consumer Price Index (CPI) declined by 0.3 percent year-on-year in July, according to the National Bureau of Statistics of China. Furthermore, data released Tuesday by the General Administration of Customs (GAC) showed that exports declined in July by 14.5 percent year-on-year.
A decline in the CPI indicates that the Chinese consumer sector fell into deflation. A report in Reuters noted that “anxiety is rising that China is entering an era of much slower economic growth akin to the period of Japan’s ‘lost decades’ (from the 1990s), which saw consumer prices and wages stagnate for a generation”.
Pathak explained that there exists a problem of overcapacity and oversupply of goods in China and credited the weakening exports to its trade war with the US since 2018.
ThePrint had reported last month that China is also facing a heightened debt burden.
To achieve growth at all costs in the aftermath of the 2008 global financial crisis, provincial governments in China, prohibited from borrowing for the most part, began setting up local-government financing vehicles (LGFVs) to raise money for large infrastructure investment projects. This led to almost doubling of LGFV debt between 2017 and 2022.
On Tuesday, Country Garden, one of China’s largest private property developers, announced that it had not paid out two-dollar bond coupons due on 6 August totaling $22.5 million, confirming fears that the realtor was having repayment difficulties, according to Reuters.
Enumerating China’s economic woes, Pathak highlighted that any financial trouble faced by China would impact the global economy given the interdependence among nations.
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China’s problem: ‘Growth at all costs’
Chinese governments since Deng Xiaoping (leader of Communist Party of China, who was the most powerful figure in the nation from the late 1970s until he died in 1997) have laid a heavy emphasis on economic growth, Pathak explained to ThePrint.
Adding to this, Aravind Yelery, an associate professor at Jawaharlal Nehru University, said the engine for China’s economic growth has always been its provinces.
“China’s economic growth over the past few decades has come from its provinces. When the provinces are facing issues today (due to heightened debt), it is a structural issue,” he told ThePrint.
According to an International Monetary Fund working paper published on 4 August about a quarter of provinces in China have a combined local government and LGFV debt exceeding 100 percent of their gross domestic product (GDP).
The paper recommends limiting the ability of the provinces to raise debt for financing investment.
Speaking to ThePrint, Ritu Agarwal, an associate professor at the Centre for East Asian Studies at Jawaharlal Nehru University, said: “The 1994 tax reforms in China centralised revenue collection while burdening provinces with infrastructure and social welfare spending. While it did give the provinces more autonomy to raise funds for projects, the growth-at-all-costs strategy led provincial governments to look at raising funding at all costs.”
Yelery pointed out that the growth-at-all-costs strategy followed by Beijing was implemented in the provinces through “incentivising provincial political leaders to not only meet growth targets but also overcome them”.
He added: “This has had huge ramifications as far as the Chinese economy is concerned.”
At a political level, promotion in the CPC was based on how much growth one could bring to their deputed region, Agarwal explained.
“To achieve this, provinces focused on revenue gained from the sale of land for commercial activities such as real estate to help circulate money in the economy. This worked when the economy was growing,” she said.
Pathak highlighted that such incentives led to overstatement of achievements by the provincial governments in their reports, thereby distorting the ground realities.
“Leadership in Beijing does not understand the ground realities of the economy as the feedback mechanisms within China are weak leading to bad decisions,” Yelery told ThePrint.
Navigating the situation
The National Development and Reform Council of China (NDRC), China’s top economic planning agency, released a list of 20 measures to boost consumption in July this year. The measures included extending support for real estate and auto sales, Global Times reported last month.
The NDRC vowed to improve the basic mechanisms and support policies for housing security, expand the supply of affordable rental housing and focus on addressing the housing problems of new urban residents. It also barred all regions from introducing new restrictive measures on purchase of cars, according to the report.
Nevertheless, Pathak pointed out, Chinese President Xi Jinping had as far back as 2014 highlighted that slowing growth was the “new normal”.
The larger question is whether the CPC is looking at steps, other than what have been announced, to help the Chinese economy grow.
On this, experts told ThePrint that various issues within the CPC have held back major structural reforms till date.
“Internally, the party is uncertain about the outcome of any reform. The leadership will only take a decision on structural reforms when they are certain that it would work and would help Beijing,” Yelery explained.
Pathak highlighted that the CPC is currently facing its own internal issues and that all is not well within the party to easily undertake difficult reforms.
“Qin Gang’s (former Chinese foreign minister) disappearance points to problems within the leadership of the CPC. But he’s not the only leader who has gone missing. At least six former leaders of the PLA (People’s Liberation Army) rocket force have gone missing or are under house arrest,” Pathak added.
Gang, who has not been seen in public since 25 June, was sacked last month without any reason being forwarded, according to a report in China’s state-run media.
According to Yelery, the Chinese political leadership does not want to publicly acknowledge a problem — it is common for them to simply state facts or make safe statements in public rather than recognise that there’s a crisis, unlike in other countries.
“The economic slowdown in China is not just an economic issue but also a political problem,” Yelery said.
(Edited by Nida Fatima Siddiqui)
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