The People’s Republic of China’s (PRC) economy, currently the world’s second largest, continues to sputter, with growth slowing to 4.7% in the second quarter, a drop from 5.3% in the first quarter and lower than forecast, according to analysts.
At the same, many analysts doubt the PRC can readily correct course to ease economic hardships for its citizens given Chinese Communist Party (CCP) General Secretary Xi Jinping’s aggressive goals for the nation to overtake the United States and its allies in manufacturing, technological leadership and military might. The regime’s lack of transparency is exacerbating concerns.
The Chinese economy is showing “severe imbalances,” according to Wei Yao, chief China economist at Societe Generale, a French credit institution. “The economy is limping along on external demand and supply-side push, whereas domestic demand remains very depressed,” she wrote in a July 2024 research note, The Wall Street Journal newspaper reported.
Many analysts blame the economic slump on the property debacle, weak consumer spending and mounting trade tensions with much of the world, which are largely due to Xi’s political and territorial aggression, The Wall Street Journal reported.
In the past few years, at least 50 Chinese developers, including some of the nation’s largest, have defaulted on international debts totaling hundreds of billions of dollars, and more than 500,000 people have lost their jobs, according to Keyan, a think tank specializing in Chinese property. Real estate and related industries previously accounted for about 25% of the PRC’s gross domestic product. Meanwhile, more than 20 million new houses across China were purchased but never finished, stranding buyers, according to news reports.
Chinese provinces and cities are also saddled with debt totaling trillions of dollars, according to analysts. Interest on the debt is leaving local governments unable to provide services and make expenditures to meet citizens’ needs, observers report.
China’s real estate crisis has spilled over into its banking sector. In May 2024, The Economist newspaper reported that 3,800 banking institutions, or 13% of China’s banking system, which holds assets totaling about $7.5 trillion, were in jeopardy. In one week in July, 40 banks disappeared, which could portend more trouble, analysts said. A lender called Liaoning Rural Commercial Bank took over 36 of the banks, The Economist reported.
Without transparent reform of systemic weaknesses, the PRC’s banking sector remains at risk, analysts contend. Many analysts advocate for more stimulus to revitalize spending and economic reform to restore private-sector confidence, according to The Wall Street Journal.
In late July, the PRC’s central bank, the People’s Bank of China, eased its monetary policy by slightly cutting the medium-term lending facility, an interest rate that enables banks to lend to individuals and businesses, The Wall Street Journal reported.
Many economists, however, doubt the measure will do much to fix the deep-rooted problems in the PRC’s economy and troubled financial sector. They also doubt that more stimulus moves will be forthcoming given the PRC’s debt load and risk of losing more foreign investment.
Moreover, Xi’s heavy investment in advanced manufacturing has accelerated deflation, analysts note.
“Even if China’s manufacturers are highly competitive and the country’s export growth remains strong, this is insufficient to offset weak domestic demand,” Donald Low, a professor at the Hong Kong University of Science and Technology, wrote in The Diplomat magazine in July 2024.
“Developments in China’s economic landscape suggest that the Chinese economy may be slipping out of Xi Jinping’s control. After unsuccessful attempts to revive the economy, the signs are that Xi is pivoting towards a deeper planned economy to solve these problems,” Simone Gao, an independent journalist, wrote that month for The Hill website.
Low questions whether Xi’s state-dominated, social engineering approach to industrial policy can work.
“When policy is driven by ideologically-motivated directives from the top, rather than by market signals, it tends to lurch from one extreme to another,” he wrote in The Diplomat.
He cited Chinese regulators’ crackdown in late 2020 on the internet industry, including e-commerce, gaming and consumer finance, which caused the loss of more than 60% of the market’s capitalization. He also noted the CCP’s COVID-19 policy that jumped from strict containment to abrupt relaxation of control measures and yielded a similar economic outcome by suppressing consumption and increasing savings. “Consequently, China never had the post-COVID rebound that almost every other major economy had,” Low wrote.
The state’s mixed signals and abrupt policy shifts worsen market shocks, making long-term planning difficult for companies and individuals by suppressing consumer confidence.
“Rather than buffer the economy from external shocks and bolster its flexibility and resilience, a more ideologically-oriented, security-obsessed government may be causing uncertainty and volatility, and delaying its recovery,” Low wrote.
