Disappointing Post-COVID Recovery Raises Doubts
China’s post-COVID recovery has fallen short of expectations, casting doubt on the sustainability of its remarkable decades-long growth. As Beijing looks ahead to 2024 and beyond, it must confront a challenging decision: increase its debt burden or accept slower growth.
Initial hopes were that the relaxation of draconian COVID restrictions would prompt a rapid resurgence in consumer spending, foreign investment, manufacturing activity, and the real estate market. However, reality has proven to be quite different. Chinese consumers are now saving their money, foreign companies are withdrawing their investments, manufacturers are experiencing weakened demand from Western markets, and both local government budgets and property developers are facing significant challenges.
These dashed hopes have seemingly validated the skepticism of those who always questioned China’s growth model. Some economists have even compared the situation to Japan’s bubble economy preceding decades of stagnation in the 1990s. Critics argue that Beijing failed to transform the economy from being reliant on construction-led development to one driven by consumption over a decade ago when it had the chance. Instead, China’s debt has outpaced economic growth, creating a burden that local governments and real estate companies are now struggling to manage.
This year, policymakers pledged to boost domestic consumption and reduce the economy’s reliance on the property sector. Regardless of the choices China makes, it must confront the challenges posed by an aging and shrinking population, as well as an increasingly difficult geopolitical environment as Western countries become more cautious about engaging with the world’s second-largest economy.
The Implications for China’s Economy in 2024
China’s current problems leave little room for delay as it grapples with crucial choices for the near future. While policymakers are eager to restructure the economy, historical challenges to reform in China cannot be ignored. Efforts to enhance the welfare of hundreds of millions of rural migrant workers, who could contribute an estimated 1.7% of household consumption to GDP if they had equal access to public services, are already facing obstacles due to concerns about social stability and costs. Resolving China’s property market and debt issues encounters similar obstacles.
The question of who will bear the consequences of bad investments lingers. Will it be the banks, state-owned enterprises, the central government, businesses, or households? Economists contend that any of these options could lead to weaker future growth. However, at present, China appears hesitant to make choices that would sacrifice growth in favor of reform.
Government advisers are advocating for a growth target of approximately 5% for the next year. While this aligns with China’s target for 2023, it will not produce the same impressive year-on-year comparison with the slump caused by the 2022 lockdowns. Such a target could drive China towards further debt, a fiscal approach that prompted Moody’s to downgrade China’s credit rating outlook to negative this month, resulting in Chinese stocks plummeting to their lowest levels in five years.
Where China directs its spending will reveal whether Beijing is truly altering its approach or doubling down on a growth model that many fear has reached its limits.