China's Economic Crossroads
thewire.in
China, the world's second largest economy and fastest growing economic power appears to have encountered a number of obstacles in its race to the top. Many prominent economists are expecting China to record an unprecedented zero-growth year, as their nation struggles to navigate its way through a flurry of political, economic and social issues.
Why is China’s economy flailing?
China’s economic turbulence cannot wholly be blamed on a single factor, but rather it can be attributed to a myriad of issues.
The Chinese Communist Party’s ‘zero-Covid’ policy has proved particularly economically damaging following outbreaks across various key cities such as manufacturing hubs Tianjin and Shenzhen. In addition to this halt on manufacturing, these relentless lockdowns have had the obvious effect of reducing consumer expenditure within these regions, putting businesses within retail, food and drink industries under major pressure. The economic consequences could be severe should the CCP retain their faith in such a policy.
China’s slumping property sector is another key player contributing to their economic strife. The property industry currently accounts for approximately one fifth of China’s GDP, with Chinese mortgagors paying New York prices for houses in the cities of Beijing and Shanghai despite on average earning a mere quarter of their American counterparts. Reports began to spread amongst homebuyers that the money they had advanced upon their unbuilt homes was being misused by developers which triggered a subsequent mortgage strike across China. There are now over 300 groups of homeowners refusing to pay their mortgages worth a total of $370billion. Such disturbance has hurt confidence within the housing market, and led to a significant drop in the demand for new homes which has consequently had knock-on effects on the Chinese construction materials industry. The Chinese Government has offered almost $150billion in loans to property developers and non-credit affecting payment holidays to mortgage holders in an attempt to ease market turmoil. However, Oxford Economics have doubts over this strategy as it seeks to prop up an “unproductive and failing real estate industry” which is not conducive to long-term growth. This erosion of one of China’s key economic pillars poses a very serious threat to their economic prosperity.
The climate change crisis has had a clear impact on global economic activity, however its effects have been particularly severely felt across China. So far this year China has been hit with severe heat waves and droughts across the Sichuan and Chongqing areas which led to a sharp rise in the demand for air conditioning, consequently placing unprecedented demand on the hydro-powered electricity grid in the region. Due to such extreme conditions, local governments forced many manufacturers such as Toyota and Foxconn within these regions to halt operation for a number of weeks. These closures have led to a significant decline in the supply of many materials such as lithium and polysilicon which are vital to the operation of other industries such as the production of electric vehicles. In light of the ongoing property market crisis, the Chinese Government was rooting on these industries performing strongly to offset such losses, but this is a hope which climate change has flattened.
What can China do?
China’s growth rate has fallen behind the rest of the Asian region for the first time, as it now seems clear they will fail to reach their annual aim of 5.5% growth. This economic instability has timed itself particularly poorly for China’s President Xi Jinping who is awaiting re-election at the CCP’s conference next week. Many economists subscribe to the theory that China has reached an economic crossroads, and is ready to enter its next era which will see the expansion of the consumer economy, and thus a reduction of a reliance on international trade. Through distributing more wealth to lower and middle income groups and boosting their disposable incomes, domestic expenditure would be destined to blossom. However, bringing about such change will require significant political action. Chinese consumers are currently incentivised to save due to their political environment which offers them with little financial, health or housing security. The CCP could instill this much needed confidence amongst their population through designing a more sophisticated financial system which would incentivise consumers to spend more and save less. This would require Xi and his Government to authorize significant change which would alter China’s political identity. This route appears to offer China a pathway to new and sustained economic growth, however analysts observe that Xi now appears much more focused on control and security rather than wealth creation and economic growth.
The world may await and see which direction the ‘Red Dragon’ decides to take as it approaches this economic crossroads.
by Oliver Watt