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Chasing China, Part 1: China’s Economic Growth Amid Challenges

China’s economic landscape in the past year reveals a mixed picture of growth and underlying vulnerabilities. According to the National Bureau of Statistics, the country’s gross domestic product (GDP) expanded by 5.2 percent, marking a rebound from nearly three years of stringent “zero Covid” pandemic control measures. However, this growth masks several challenges that could impede China’s economic trajectory.

Positive indicators such as record-setting car production, increased construction of new factories, and a surge in exports showcase the resilience of China’s economy. Car sales, particularly for electric vehicles, saw a boost due to deep discounts, while construction and manufacturing sectors experienced significant activity. Despite these encouraging signs, the economic strengths conceal weaknesses, raising concerns among economists.

One noteworthy aspect is the reliance on exports to compensate for weak domestic demand. Many factories operated at reduced capacity within China, prompting a need to export more to sustain growth. This strategy, while contributing to overall GDP expansion, raises questions about the sustainability of the economic model, especially as global economic conditions remain uncertain.

China’s economic growth, while robust in the short term, faces long-term challenges that could lead to a slowdown. High levels of debt, a housing crisis eroding consumer confidence, and a shrinking, aging workforce are identified as key factors weighing on the country’s economic output. Western economists predict that the growth rate may dip to 4.5 percent or less this year, reflecting not a cyclical downturn but a more protracted decline termed as secular stagnation.

Secular stagnation, characterized by a chronic excess of savings leading to slow growth, deflation, asset bubbles, and financial strains, is a concern that has shifted from the Western Hemisphere to China, according to Lawrence H. Summers, a former Secretary of the Treasury. This economic phenomenon could have profound implications for China’s economic landscape, impacting prices and potentially leading to financial challenges for heavily indebted families and companies.

Another critical factor influencing China’s economic maneuverability is its heavy debts and the substantial interest payments they require. Government responses to economic weakness, such as increased spending on infrastructure and lending to favored industries, have juiced growth but resulted in a continuous rise in debt levels, particularly at the local level. Moody’s negative outlook and DBRS Morningstar’s downgrade of China’s government debt underscore the concerns regarding the country’s financial health.

The Chinese government’s shift away from stimulating the economy through borrowing and infrastructure spending adds to the apprehension about a growth slowdown. Zhang Jun, the dean of the School of Economics at Fudan University, suggests that this reticence to borrow and spend might contribute to the inevitability of the growth slowdown.

As China grapples with these challenges, the issue of housing market instability looms large. The housing crisis, characterized by falling prices and a decline in transactions, has led to a lack of confidence among households. Developers face struggles in raising money for new projects, and investors worry that the completion of promised apartments could result in a steep decline in construction activity. The state-controlled banking system’s shift away from real estate loans to industrial companies reflects the government’s changing priorities in response to economic challenges.

Despite these concerns, China’s government maintains that the economy achieved steady, high-quality development, meeting the set growth targets. The challenge now lies in addressing the chronic excess of savings and encouraging households to spend rather than saving in bank accounts, which could define China’s macroeconomic landscape for the next decade.

In Part 2, we will explore the potential strategies and implications for China as it navigates these economic challenges and seeks to sustain growth amid a changing global landscape.