Is China’s economic miracle nearing its end?

GDP growth is losing momentum. It came in at 6.3% in the second quarter, from a low base a year ago. Even as a record 11.58 million graduates are set to enter the workforce this year, youth unemployment is widespread. The jobless rate for the 16-24 age group hit a new high of 21.3% in June.

Exports and imports both slumped in July and the consumer sector slipped into deflation as households and companies held on to cash rather than spending or investing it. The consumer price deflation – the first since February 2021 – is all the more stark in a global economy reeling under high inflation.

Surveys of consumer confidence showed that weakness during the lockdowns recovered early this year as pandemic restrictions were eased in December. Since then, Chinese consumers have been cautious about spending. Several dampeners are at work here. China’s housing market is in crisis and declining real-estate prices have left consumers feeling poorer. Wages are stagnant after rising for two decades. Out-of-work youngsters have made families conservative about spending.

Surveys of purchasing managers show the manufacturing sector was on track to shrink for the fourth straight month in July. Surveys of the services sector show that growth slowed considerably, dragged by delays in housing construction over the past two months.

China’s exports are feeling the pinch as central banks in advanced countries fight inflation by cooling consumption demand. They are at their lowest level since the pandemic hit in early 2020, and could take a while to recover.

Deflation, the fall in production as well as consumption, shrinking exports, and the government’s belligerent towards business don’t augur well for China’s economy, especially with the Biden administration looking to shift global supply chains away from China. Concerns are now being raised that the country will struggle to match the growth rates it saw in previous decades.

Is China’s economic miracle nearing its end?

While the latest official data indicates that China’s once unstoppable economy is losing momentum, it is premature to conclude that the China miracle has ended.

This miracle has been powered by three engines of growth – exports, real estate and infrastructure projects – and all three are sputtering. Since the shock of the global financial crisis of 2008, Beijing has tried to build a fminourth growth engine – domestic consumption. But the share of consumption in GDP growth is down to 32.8% from 54.5% in 2021.

The official narrative is that the economy has hit a soft spot, troubles will be brief, and the growth targets for the year can still be met. The politburo has described China’s post-covid economic recovery as a “wave-shaped development, and advancement with setbacks”.

After the GDP figures were released in July, Beijing pledged to build the private economy “bigger, better and stronger”. The National Development and Reform Commission’s (NDRC) measures for shoring up consumer confidence appear weak compared to the shock-and-awe stimulus administered after the global financial crisis of 2008. Chinese consumers “have very little confidence and are very concerned about the economy,” Li Chunlin, vice chairman of China’s National Development and Reform Commission said.

During the covid-lockdowns, consumers in rich countries spent their stimulus checks to buy manufactured goods imported from China. Beijing’s stimulus aims to give its own citizens more power to buy goods and services produced in China. It includes subsidies for electric cars and greater access to social housing.

So far, the damage from the Biden administration’s moves to diversity away from China seems limited. The Economist’s calculations show the move has not hurt China as much as the US would have liked, as the supply chains have turned opaque and the US’s reliance on China for critical inputs remains undiminished. Rather than entering the US directly, Chinese supplies are landing there via other countries. “Much of the decoupling, then, is phoney,” The Economist writes.

As it struggles with immediate and structural economic challenges, one assertive step Beijing has taken is to name Pan Gongsheng as the new governor of its central bank, the People’s Bank of China (PBOC). Although the central bank governor is a key figure in the economy, the elevation is significant as the technocrat isn’t regarded as a close ally of President Xi Jinping and has a reputation for being an outspoken hardliner. This suggests Beijing may be prepared to test a firm hand on the wheel. As deputy governor, Gongsheng tightened rules governing property speculation and warned of a housing bubble that has now become one of the economy’s biggest pain points.

China may not quickly return to blockbuster growth any time soon but that doesn’t mean its economic power is ending. The World Bank has predicted a ‘lost decade’ for the global economy amid multiple economic and geopolitical challenges. Growth prospects of all countries are being adjusted accordingly.

Rakesh Mohan, a part-time member of Prime Minister Narendra Modi’s economic advisory council, has calculated the head-start China enjoys. Even if India’s GDP growth could be accelerated to exceed 8% a year (from just above 7% right now), India will hit a per-capita income of $8,500 by the late 2030s, lower than where China is today. On life expectancy, India is 30 years behind China. And despite huge improvements in gross enrolment ratios, India remains 15 years behind China on secondary education.

As recently as the first quarter, Bloomberg data shows, companies ranging from Starbucks to Nike, Adidas and Burberry reported anywhere from 10-40% growth in China revenues. Elon Musk’s Tesla is selling a third of the electric vehicles it makes in China.

What Beijing needs to do to kickstart spending is restore Chinese consumers’ trust that the future will be better than the present. Dismantling restrictions, such as those on digital companies that were until recently a source of new jobs, may be the best way to go about rebuilding consumer confidence.