The trajectory of China’s post-COVID recovery has stirred uncertainties, prompting a critical crossroads for Beijing in 2024. The dilemma revolves around a choice between accumulating more debt or opting for restrained growth.
Anticipations of a swift rebound post the abandonment of strict COVID measures have faltered. Contrary to expectations, Chinese consumers have become more frugal, foreign investments dwindled, manufacturing faced weakened demand, and the property market encountered turbulence with defaults from developers.
These setbacks have fueled skepticism about China’s growth model, with some economists drawing parallels to Japan’s economic bubble preceding its “lost decades” of stagnation in the 1990s. Critics argue that China failed to transition from construction-led development to consumption-driven growth, leading to escalating debt levels that are now challenging local governments and real estate firms.
Despite policymakers expressing the intent to boost consumption and reduce reliance on property, a clear long-term plan for debt reduction and economic restructuring remains elusive.
China confronts additional challenges such as an aging and shrinking population and geopolitical complexities, as the West becomes more cautious about engaging with the world’s second-largest economy.
Why It Matters:
China, outperforming the global economy, likely grew around 5% in 2023. However, the over 40% investment of its output, exceeding twice that of the United States, suggests a significant portion of this growth is unproductive. Many Chinese citizens do not feel the economic growth, evident in a youth unemployment rate surpassing 21% and household wealth predominantly tied to property, leaving homeowners feeling financially strained.
The overarching pessimism may pose social stability risks for President Xi Jinping. A Japan-style decline could have profound global implications, as numerous industries rely heavily on Chinese suppliers, and regions like Africa and Latin America depend on China for commodity purchases and industrialization financing.
What It Means for 2024:
China faces pressing decisions in light of its economic challenges. Policymakers aspire to restructure the economy, emphasizing difficulties inherent in past reform attempts. Initiatives like boosting welfare for rural migrant workers, potentially contributing 1.7% of GDP to household consumption, are encountering resistance due to concerns about social stability and costs.
Resolving property and debt issues involves dilemmas about who bears the burden of bad investments, with potential consequences for future economic growth. Despite the need for reform, China appears hesitant to sacrifice growth, with government advisers proposing a 5% growth target for 2024, potentially leading to increased debt.
The allocation of funds will be indicative of Beijing’s approach – whether it signals a shift in strategy or a reinforcement of a growth model that many believe has reached its limits.