Introduction:

• The news of China’s economic slowdown has generated mixed reactions, causing concerns not only within China but also globally.
• Understanding the causes and scale of China’s current economic challenges is crucial to grasp the significance of this slowdown.

Past Economic Policies and Challenges:

• In 2007, Premier Wen Jiabao highlighted the instability, imbalance, lack of coordination, and unsustainability of China’s economic growth.
• China’s response to the 2008 global financial crisis involved substantial investments in infrastructure, masking issues like low consumption, regional disparities, and social security deficits.

• The pursuit of double-digit growth to maintain domestic legitimacy led to overreliance on unsustainable strategies.

The “New Normal” and Economic Shifts:

• China’s recognition during the 19th party congress in 2017 that it needed to prioritize quality of life over export-driven growth marked a significant shift.

• The era of “new normal” called for adapting to growth rates below 10%, resulting in challenges like rising unemployment due to a growing working-age population.

Labor Costs and Overproduction:

• Labor costs rose as social security investments increased, impacting export growth rates.
• Sectors like housing, energy, and construction overproduced, leading to excess inventory despite supply-side reforms.

Political Choices and Economic Management:

• China’s unique political economy requires political choices to address economic challenges.

• Xi Jinping’s rollback of promises to allow markets to play a greater role highlights the party’s control over capitalist activities.

• Government interventions, such as during the 2015 stock market crisis, and currency restrictions, have been implemented.

Social Security Measures and Policy Outcomes:

• Despite efforts to reduce excessive saving, progress in implementing social security measures has been slow.

• Policies like “Common Prosperity” and “Dual Circulation” have not achieved the desired results.

Factors Contributing to the Slowdown:

• The slowdown, perceived to have started in 2015, was initially masked by government spending on urbanization.

• Factors like the U.S.-China trade war, de-risking strategies, and the zero-COVID policy exacerbated the economic downturn.

• Recent data suggests heightened caution among people and companies, leading to cash hoarding and delayed investments.

State-Owned Enterprises (SoEs) and Challenges:

• SoEs, due to their political networks and contracts, pose challenges for reforms and changes in their operations.

• These enterprises also provide social security, making them politically sensitive.

The Evergrande Crisis and Structural Issues:

• The Evergrande crisis exposed China’s housing bubble and highlighted misregulation and path-dependency issues.

• Path-dependency may lead to a crash landing for the Chinese economy, which has been a long-term concern.

Future Implications:

• China’s economic growth, even at a 5% rate, continues to add significant value globally.

• It may impact global commodity prices, including crude oil, cement, and steel, which could affect other economies.

• Economic instability could influence China’s perception of its rise and its risk appetite in border disputes.

Conclusion

China’s economic slowdown is a complex issue rooted in past policies, changing economic dynamics, and unique political considerations.

Understanding these challenges is crucial for assessing their potential impact on China and the world.