China’s Economic Woes: 4 Years On

Owen Tsai is a second-year Philosophy, Politics and Economics student. He currently works at Global Weekly alongside the Diplomacy Review, contributing to geopolitical analysis pieces published bi-weekly. Email: owenhhtsai@gmail.com.

Introduction

「近几年有一种议论，说下个世纪是亚洲太平洋世纪，好像这样的世纪就要到来。我不同意这个看法。」

“In recent years, people have been saying that the next century will be the century of Asia and the Pacific as if that were sure to be the case. I disagree with this view.”

This is a quote from former Chinese General Secretary Deng Xiaoping. Widely lauded as the catalyst of China’s modern economic progress, he made clear that future Asian prosperity is only contingent on those developing and becoming developed, be it India, Bangladesh, Pakistan, or his nation. 

He would be proud of what China has achieved. The undisputed No.2 economy of the world and a serious challenger to the US-led Western world order, China has well and truly done what Deng set out to do. China did “let some people get rich first”, lifting 800 million out of poverty in the last four decades. Under his model of “Socialism with Chinese Characteristics”, China has experienced an unbroken streak of growth, and it seemed that the Asian Century, China’s Century, had become a reality. 

2020 was the year that brought that view into dispute. A devastating pandemic and a questionably strict response exposed several systematic weaknesses unrectified until too late, and its people paid a dear price for it. Four years after these financial crises came to the surface, signs of recovery may be present but not as apparent as the government would prefer. The House of Cards may not have fallen, but it is far from firm. I believe that Deng’s scepticism was not blind pessimism but reasoned wisdom. 

This article seeks to explore the state of China’s economy in 2024, how it came to be, how the Chinese are living through it, and what the future holds. 

Fundamental causes 

The two main drivers of China’s growth are investment and trade. Any overreliance on either would make the economy vulnerable to exogenous or endogenous shocks, and we saw exactly that from 2020 onwards. While the nation prides itself on the strength of these pillars of the economy, it is also precisely the flaws in these sectors, exploited by unprecedented events, that led to the quagmire that the government and its people are currently in. 

Out of the gross domestic product (GDP) “Big 4”, investment is perhaps the most crucial to the Chinese economy. While recent decades saw the Chinese economic boom, there was a surprising lack of investment diversification, or more precisely, a shortage in attractive investments aside from real estate, which took up 60% of Chinese household assets in 2023. The Chinese saw home-owning and second-home investing as a safer bet than dabbling in the stock market, which Xi never saw as essential to the economy; home-owning was also culturally significant and associated with familial values and a prerequisite for marriage. Yet, little of the systematic problems of the property sector were known then. Property developers, most notably Evergrande, rode the wave of incessant demand for property and continued borrowing to build more, in the myopic belief that the market is due to grow consistently. It took 2 years of an unstoppable pandemic and the absolutist Zero-COVID policy for the housing bubble to burst. With consumption and investment levels falling, dragging real property prices down with them as the economy looked set for recession, and more people struggling to pay their mortgages, the real estate market was dealt a blow that it had still yet to fully recover from. And without any real competing investments within the country, the economic effects of the property crisis, now marked by the now-bankrupt Evergrande defaulting on its debt in 2021, were disproportionately large. 

The problem with China’s trade is more complex. Aside from COVID-induced global commerce disruptions hurting import-reliant countries (which all countries practically are), such as energy and food-importer China, and geopolitical tensions potentially amplifying those effects, China faces a long-term export issue. For decades, China has remained the world’s manufacturing hub, being the producer of 20% of the global total of manufactured goods. The success of this industry naturally relies on an abundant, youthful labour force, which China has had to this day. However, the nation’s demographics forecast an unsavoury future for the sector. China’s fertility rate in 2022 was 1.09 births per woman, almost half that of the expert-recommended rate of 2.1; 2022 and 2023 also saw China’s population fall after 60 years of continuous expansion, and it is projected to shrink for the foreseeable future. Supply-chain worries brought on by the pandemic and lockdown policies brought this to the forefront, but for demographers, China’s population crisis was a long time coming, with the government’s hesitance to relax Deng’s controversial one-child policy considered a root cause. The manufacturing engine for China’s economy, and by extension, the export pillar, is due to be untenable with a slumping working population, and these 4 years were a warning of what may come next for the no.2 economy of the world. 

There were, of course, other things that went wrong. Foreign investment into China has drastically decreased as relations with the West continue to sour, for one. Local government debt is also a rather large talking point in Chinese economics, which may require an entirely separate piece of its own for in-depth analysis. But perhaps what is most worrying for the nation is not something that went wrong; rather, it is something that did not go right. Consumption, for most economies, would be the chief stimulant for economic growth; it has also been scarcely mentioned in this piece for good reason. Stagnating consumption levels are the central reason for China’s continued woes, and to understand it, we must consider the perspective of the consumer, or in more compassionate terms, the lives of people living in China. 

On the ground

As someone who makes a living out of transnational property projects, my mother would convene with Chinese business partners daily and bring home stories of work. While some were about ordinary everyday work and office melodrama, many and more told of the plague of pessimism among Mainland firms, households and individuals, not only in business and investment terms but also that of personal experience. Curious, I sought alternate accounts and explored the social climate of China. 

The last few years saw a notable drop in Chinese optimism. A poll shows that less than 40% of Chinese respondents feel that their household financial circumstances have improved in the past 5 years, and 47% are hopeful for the future, much lower than the 77% and 73% of 2014, respectively. Predictably, a large part of that is down to what the COVID pandemic did for the world, not only China. But there are alternative explanations that point to deep-rooted societal problems. 

In 2019, Chinese billionaire Jack Ma praised the “996 system”, a colloquial way to refer to a 9 am to 9 am, six-day work week. After firms continually abused China’s 44-hours-per-week labour laws, and social outrage over China’s exhausting work culture grew day on day, China definitively outlawed 996, and firms abided. Yet the “tang ping” (lying flat) culture among the Chinese stayed. Many young adults are choosing to rest and relax instead of working, either cutting back on their commitments to their jobs or quitting them entirely. In June 2023, China stopped publishing youth unemployment statistics after it rose to a record high of 21.3%.

If we look at this phenomenon through the lens of demographics, the picture suddenly becomes clearer. China is currently experiencing a nigh-unstoppable workforce shrinkage; with a lower demand for labour, employers may hire at lower costs, and so they do. The traditional means for wage bargaining – unionising – is illegal, save for the sole lawful All-China Federation of Trade Unions, who barely represent any actual workers

and do not work for their interests. If the government is to mitigate the problem of public dissent over wage levels, then it should seek legislative means to raise the national average.  

Yet China has done almost the exact opposite. The highest hourly minimum wage in China is the capital Beijing’s RMB 26.4, equivalent to a painfully meagre USD 3.7. And here is where China’s export over-dependence and demographic troubles intersect again. For Chinese manufacturing exports to stay competitive, their costs of production must be lower than those of other states. Mechanising and specialising is one way to drive costs down that China has adapted; keeping wages low is another. A large part of China’s enduring economic success comes down to artificially retaining the cheapness of its labour. 

This all converges into one simple conclusion: the Chinese working class and middle-income groups do not have much income to spend. Household consumption takes up only 39% of China’s GDP, far lower than the OECD member-nations mean of 54%. With economic stagnation dragging on, the Chinese continue to spend little, and the IMF-advised transition to a consumption-led economy from an investment and trade-reliant model looks ever so unlikely. The cycle of low consumption levels begetting little economic progress and little progress causing low wages has also caused many families to rule out having children, which adds fuel to the nation’s demographic wildfire.

What’s next?

It must be stressed that predictions of a permanent growth slowdown or even economic collapse in China should be taken with a generous pinch of salt. Many have wanted to foretell the imminent failure of the Chinese model for growth for decades, and yet the Chinese financial machine has kept on going, producing an above-world-average 4.8% estimated growth this year. China was able to survive the crisis-ridden year of 2022; it would surely live for much longer. 

However, there are practically 0 quick fixes useful for the state. Structural problems are not resolved with financial stimulus policies, which some are already sceptical about. Years of policy reform and fine-tuning would be the bare minimum required to give people the confidence to consume and invest, to provide an alternative to exports made by cheap labour, and to propel lasting prosperity. The road ahead is long and winding. 

It is also not without roughs and obstacles. Amid trade war speculations between China and its second-largest trade partner after ASEAN, the EU, President Donald Trump, promising a blanket 60% tariffs for Chinese exports, is re-elected. Simultaneously, China has released another rare stimulus package to strengthen its economy, a move seen by some as “bracing” for China-US trade tensions.

The short-term effects could be a sizable drop in GDP growth in 2025, which the Chinese may not be able to stop as the US amped up decoupling efforts recently and now exports much less to China than before. But consider the primary problems that China’s economy faces. The drop in foreign investment was mostly caused by Western investors pulling out for political reasons, and they are unlikely to come back anyway. Moreover, if an overdependent export-led model of growth is not to be done away with in the meantime, the nation can still shift its trade focus to the Global South to cope, a move currently under progress. 

And lastly, but most importantly, any exogenous factor that may force the hand of the government to do away with trade overreliance and leave products meant for export to the domestic market may lead them to ultimately face the problem of underconsumption head-on. The main criticism of recent financial relief policies was still the absence of meaningful addresses to the household consumption lull, which cannot be uplifted with incremental policy shifts. 

By “letting some people get rich first”, Deng’s ultimate goal was to leave no one behind, even if many, including him, would not live long enough to see it fulfilled. As someone who did not agree with most of his methods, I can appreciate his vision as a national ideal that the nation must constantly work towards. As Chinese society continues to depress and worldwide economic turmoil beacons, perhaps now is the time for the government to not only safeguard its people but also reward them for the social hardships they endured over the last 4 years.