Earlier this year, China had emerged from nearly three years of Covid-related lockdowns, and the economy was poised for a resurgence. However, this optimism quickly faded. Contrary to expectations, not only did the anticipated growth fail to materialise, but the situation worsened. People were reluctant to spend, leading to a decline in economic activity nationwide.
The Waking Tiger
China’s economic trajectory had long been seen as an unstoppable force, driving its ascent as a global superpower. But a series of crises, from a real estate bubble fueled by excessive borrowing to escalating debt problems and skyrocketing youth unemployment, have shaken this once-vibrant economic landscape. This has given rise to a new and concerning problem: a crisis of confidence.
The growing lack of faith in China’s economic future has led to a ripple effect. Consumers are cautious with their spending, businesses are reluctant to invest or create jobs, and potential entrepreneurs hesitate to start new ventures. This crisis of confidence has been exacerbated by the downward spiral it fuels. Consumers fear for their job prospects, leading to reduced spending, which in turn prompts companies to cut costs and freeze hiring.
In recent weeks, China’s stock markets have witnessed an exodus of over $10 billion from investors. The Hong Kong stock market experienced a bear market, signaling a decline of more than 20% from its peak in January. This mounting crisis of confidence is a stark contrast to China’s history of resilience in the face of challenges, where it rebounded from the 2009 financial crisis and the trade war with the United States.
Head in the Sand
However, the current economic climate presents new challenges. China’s policymakers have fewer viable options to counter the downturn, given the combination of domestic problems and past policy decisions. Unlike past crises with international dimensions, the current crisis stems from a convergence of long-standing domestic issues, many of which are consequences of previous policy choices. To address this confidence deficit, China’s government has halted the release of troubling economic data, such as youth unemployment figures and consumer confidence surveys. The abrupt removal of these indicators has fueled speculation and anxiety among the population, leaving them uncertain about the true state of the economy.
In Part 2 of this series, we will explore the specific policy measures, changing economic landscape, and potential implications of China’s crisis of confidence.