For much of the past four decades, China's economy had seemed unstoppable, propelling the country to global superpower status. But today, the economy is beset by a series of crises, including a real estate crisis stemming from overbuilding and excessive borrowing, a burgeoning debt crisis, and record levels of youth unemployment, reported The New York Times (NYT).
In the midst of these economic challenges, a crisis of confidence is emerging, with growing doubt about the Chinese economy's future.
After nearly three years of debilitating Covid lockdowns, China had lifted its restrictions in late 2022, and the economy appeared poised for a strong comeback.
At the start of this year, David Yang was brimming with optimism about his perfume factory in eastern China. Yang and his two business partners invested over USD 60,000 in March to expand their factory's production capacity, anticipating a surge in demand, as reported by NYT.
However, those expectations have failed to materialize. In fact, the situation has worsened. Yang lamented, "People are not spending, and orders have dwindled to one-third of what they were five years ago. It is disheartening. The economy is really going downhill right now."
Larry Hu, the chief China economist for Macquarie Group, an Australian financial services firm, noted, "Low confidence is a major issue in the Chinese economy now." This lack of confidence is fueling a self-perpetuating downward spiral, where consumers are hesitant to spend due to job concerns, and businesses are cutting costs and refraining from hiring due to reduced consumer spending.
In recent weeks, investors have withdrawn more than USD 10 billion from China's stock markets. China's top securities regulator has even pressured national pension funds, banks, and insurers to invest more in Chinese stocks. Last week, Hong Kong stocks entered a bear market, plummeting more than 20 per cent from their January peak, according to NYT.
China's resilience in the face of past challenges has fostered deep confidence in its state-controlled economic model. It rebounded swiftly from the 2009 global financial crisis, weathered a trade war with the United States, and demonstrated its indispensability during the pandemic. However, the current confidence deficit is exacerbated by the perception that China's policymakers have fewer effective tools to combat the downturn than in the past.
Unlike previous international crises, China now grapples with a convergence of long-standing domestic issues, some of which have been exacerbated by policy changes under President Xi Jinping's government. Past crises prompted substantial stimulus packages and targeted interventions, such as cash incentives for urban redevelopment. Today, the landscape is different, with local governments and businesses burdened by debt and reduced borrowing capacity. Moreover, after decades of infrastructure investments, there's limited demand for large-scale projects to stimulate the economy.
Complicating matters further, some of the economic problems have been precipitated by the government's own actions. The "zero Covid" lockdowns brought the economy to a halt, government measures to curb developer borrowing have shaken the real estate market, and crackdowns on the tech industry have led to cutbacks in technology firms.
When China's top leaders convened in July to address the deteriorating economy, they did not unveil a major spending programme, as many had expected. Instead, they presented a list of familiar pronouncements, with an emphasis on the need to "boost confidence" without specifying concrete measures.
Faced with declining confidence, the government has ceased publishing certain economic data. For example, China's National Bureau of Statistics has stopped releasing youth unemployment figures, a key indicator of economic health, and discontinued surveys of consumer confidence. This abrupt halt has left some social media users speculating about what might be concealed.
Laurence Pan, 27, who had been observing caution among clients about spending since 2018, recently struggled to find a new job, applying for nearly 30 positions in the past month without receiving an offer. With so much uncertainty, he has cut back on his spending, saying, "This might be the most difficult time I've ever been through," the New York Times reported.