ASSESSING CHINA’S POST-PANDEMIC ECONOMIC RECOVERY

Last month, China’s Golden Week stimulated the revival of its domestic consumption in several sectors like tourism, online services and more, surpassing the 2019 (pre-pandemic) levels for the first time after three years. In addition, data released for the first three quarters of 2023 also showed that China is on a path to economic recovery after its three years of strict economic regulations under the Zero-COVID policy.

Despite such positive signs, persisting concerns regarding the sustainability of this recovery remain due to frequent variations in monthly data. These concerns are evident from Chinese President and Communist Part of China (CPC) General Secretary Xi Jinping’s cautious words at the Central Financial Work Conference held on October 30-31, where he emphasized that the prevention and resolution of financial risks remains the “eternal theme” for Beijing amidst domestic and global risks. These risks include weak domestic consumption, ageing population, rising debts as well as global headwinds like US-China trade war and decoupling trends. This has led many analysts to compare this situation with Japan’s two decades of stagnant growth and deflation after the 1990s, leading to assessments of a potential collapse of the Chinese economic miracle. Thus, amidst China’s global narrative of a positive economic recovery, it is important to assess the impact of these issues - both structural as well as cyclical - which will determine the sustainability of its post-pandemic economic recovery.   

Showing the Signs of Economic Recovery

Data released by China’s National Bureau of Statistics (NBS) in the past few months has shown some signs of economic recovery after three years of declined growth. Owing to a year-on-year GDP growth of 5.2 percent between January to September 2023, China is likely to achieve its targeted growth of 5 percent this year if the growth trajectory continues in Quarter 4. However, while this figure may look impressive when compared to 2.9 percent growth in 2022, it is important to note that it is still well below pre-pandemic growth rate of 5.95 percent in 2019.

China’s manufacturing purchasing managers’ index (PMI), which indicates expansion of production activities, has also witnessed some recovery in September after six months of continuous contraction. However, this growth remained short-lived as PMI contracted again as per the latest October figures from 50.2 to 49.5. While it is largely accrued to weak export demand caused by dear monetary policies globally, it certainly indicates that China’s recovery path will not be as smooth as it is being painted by Chinese economists.

The rate of decline in China’s exports also settled at -6.4 percent in October, slightly up from -6.2 percent in September, but better than -8.8 percent in August. However, with China’s focus on dual circulation strategy, exports are less likely to contribute significantly in its economic recovery. Meanwhile, China’s imports registered 3 percent growth in October, implying moderate success for China’s efforts to boost domestic consumption. However, this import growth needs to be supplemented with a rise in domestic productivity to ensure that people have sufficient disposable income to spend. In this regard, industrial production registered 4.6 percent growth in October, up from 2.4 percent at the start of this year, which shows real improvement in China’s industrial capacity. On the demand side, retail sales of consumer goods grew at 7.6 percent in October, which had previously settled at around 5.5 percent since China lifted Zero-COVID restrictions.

Although it indicates marginal recovery of consumers’ confidence in markets, this jump in October is largely accrued to Golden Week celebrations. Retail sales growth in the next few months will reveal whether Chinese markets have regained consumers’ confidence or not. Thus, China’s growth indicators have several inherent challenges which Xi and his economic team need to be cautious about for ensuring sustained economic recovery.

Looming Economic Woes

Despite these signs of economic recovery, China is still grappling with several issues which pre-date the pandemic and were exacerbated by restrictions imposed during the same. Most importantly, deflationary pressure has started to intensify in China as the inflation rate based on Consumer Price Index (CPI) has reached the zero mark in July 2023 and further declined to -0.2 percent in October. If this deflationary pressure is sustained for the next few months, which is likely to be the case in the current scenario, then it would not only drag economic growth down, but also create hindrances for increasing the productive capacity of Chinese businesses. This will further force China to rely on imports and foreign businesses to drive domestic growth, which may create external vulnerabilities – something that Xi Jinping aims to avoid.

This problem of deflation has been caused by several factors – one of the most fundamental ones being weakened confidence of both foreign investors and domestic consumers in Chinese markets. Besides marginal growth in retail sales, this lack of confidence has manifested through higher savings rate among Chinese households as well as weak performance by Chinese stock markets in the past few months. Slowdown in growth coupled with dollar debt defaults by Chinese businesses have propelled global investors to sell-off Chinese stocks causing a severe downward trend in its share markets. The Evergrande crisis and the recent default by Country Garden Holdings which was once China’s largest developer by contracted sales have further shaken investors’ confidence in Chinese markets.

It is no surprise that most defaulted Chinese companies are from the real estate sector, which has continuously worsened despite several policy interventions by the government over the past few years. Between January to September 2023, investments in property have fallen down by 9.1 percent which is worse than 8 percent during the same period last year. This burgeoning crisis has the potential to nullify China’s post-pandemic recovery efforts as the real estate sector has alone contributed around 25 percent of China’s GDP for the past three decades. Both the central and provincial governments have initiated several policy measures to attract citizens to invest in the property sector which include lowering mortgage rates for first-time home buyers as well as down payments being lowered for second and third home buyers.

Despite these efforts, contracted sales of top 100 developers in China have reduced by 33 percent in July 2023 compared to last year. This has further put a financial burden on local governments for which land revenue has been the major financial source. Coupled with rise in public expenditure during the pandemic, local government debts have crossed 92 trillion Yuan in 2022 (US$12.8 trillion) and can rise further by the end of 2023 due to dismal to no improvements in government revenue. Hence, China’s economic recovery will be severely hampered and will remain unsustainable until these fundamental issues are not resolved in time.

New Drivers of Growth

As China’s real estate sector deals with its crisis, Beijing has identified new sectors that can drive its growth. These sectors will have multiple responsibilities like employing educated youth, gaining consumers’ confidence back as well as absorbing additional industrial resources. The Politburo meeting in July 2023 put emphasis on such strategic emerging industries that can drive a boost in China’s domestic consumption. These industries include new energy, digital economy, artificial intelligence, advanced manufacturing and other similar industries with high technology requirements. Amongst these, the size of digital economy sector has reached 50.2 trillion Yuan (US$ 7.25 trillion) and accounted for 41.5 percent of GDP in 2022. Digital economy is further expected to be integrated with advanced manufacturing and other modern services as a major growth engine for China.     

Furthermore, as China aims to be the advanced manufacturing hub by 2035 with heavy emphasis on domestic innovation, the new energy sector will play a major role in this transition. In fact, China already dominates 60 percent global electric vehicle sales and has added value of 11.4 percent to GDP between January-September 2023. These sectors are not only critical for China’s technological self-sufficiency, but it will also be able to absorb highly educated Chinese youth and thereby address multiple issues at the same time.

However, crackdown on digital technology and ed-tech companies along with Xi’s emphasis to push for common prosperity have alarmed many Chinese entrepreneurs which may affect sustained growth in these sectors. Moreover, owing to restrictions imposed by western countries on technology transfers, China will find it difficult to achieve higher growth in these sectors in a short period of time. Thus, even if these new growth drivers may seem attractive for China, replacing the role of the property sector in driving China’s growth trajectory will be a herculean task for Xi Jinping.

It is certainly true that China’s miraculous economic growth of over 7-8 percent has ceased to exist and will not return in near future, but it is equally true that China will not bottom out to Japan’s stagnant growth rate considering policies that are already in place as well as China’s position in contemporary global economy when compared to that of Japan in 1990s. Persisting issues in the Chinese economy like real estate crisis, weakened confidence in Chinese markets along with China’s economic conflict with western countries will persist over a longer period of time and can affect China’s economic recovery. Chinese policymakers are certainly aware of these structural issues and have taken efforts to resolve them at various levels. However, these policy measures also have their own challenges which have reduced effectiveness of these measures. Thus, even though China’s present economic indicators look positive in terms of its post-pandemic recovery, the underlying fault lines need to be addressed with more precision to sustain this recovery in the coming years.