Growing pains: China’s faltering economy tests the nerve of leadership | Economic Sciences

On his tour of the southern Chinese city of Shenzhen last week, Li Keqiang, the premier, tried to send some positive energy at a time when many citizens have complained of economic difficulties.

“The opening of China will continue. The Yellow River and the Yangtze River will not flow backwards,” Li said, sounding optimistic as he toured the port of Yantian, a gateway to Europe and North America, two of China’s biggest markets.

“The waters of Yantian port will also flow incessantly and not only continue to maintain its advantages, but also expand them,” Li added. Last year, however, the traffic was far from relentless: Covid rules closed the port, delaying deliveries over Christmas. This spring, similar restrictions forced boats to queue to enter.

Since the beginning of this year, China’s insistence on a zero covid policy has caused a lot of inconvenience and uncertainty for its people and the struggling economy, raising serious concerns within the country about what comes next.

“The real estate sector is sick, all investments are falling, and people are saving instead of spending,” says Hong Hao, a prominent market analyst whose social media account was censored this year after gloomy comments about the economic outlook.

Hong highlights three big headaches for politicians in Beijing: Covid, property, and troubled relations with major Western countries. “But in reality there are obstacles everywhere, and it’s hard to discern which one is the biggest.”

These obstacles will almost certainly keep China from reaching its own economic growth target of “around 5.5%” this year, which Li set in March. In another worrying development, the July unemployment rate among 16-24-year-olds hit a record 19.9%, according to the Office for National Statistics.

So much so that a recent politburo meeting chaired by President Xi Jinping omitted any mention of a GDP target, instead suggesting that the country should “stabilize employment and prices, keep economic operations within a reasonable range and strive to achieve the best possible result. results”.

The concerns expressed within China are palpable, although there is also consensus that if its growth model is not reformed, the economy will soon run out of steam. But any change, for example through Beijing’s tough real estate policies announced in 2020, would cause major disruption, at least in the near to short term. In other words, Beijing is facing a real political dilemma.

“The two fundamental problems for China are a slowdown in natural growth and an improvement in its regulatory environment,” says Nancy Qian, an economics professor at Northwestern University in Chicago. “Both are standard growing pains as the economy grows from low income to upper middle income.”

Qian says China’s growth is slowing and will stall because it has reached the limits set by its fundamentals. “Unemployment cannot be reduced without creating new jobs. But how can there be new jobs if existing companies are not making more money? And a lot of firms, like real estate firms and the struggling construction industry today, have done much worse than we thought.”

Poor economic performance may be unavoidable, but it has real social and potentially political consequences. This is particularly the case in a system without the safety valve of elections.

Last month, news broke that hundreds of homebuyers across the country were banding together to reject mortgage payments on homes left unfinished by developers. On social media, angry buyers discussed ways to attract government attention to put pressure on “greedy and dishonest developers”.

Sensing that a social crisis was brewing, Beijing quickly devised measures to defuse tensions and help the real estate sector, which accounts for 25% of the Chinese economy. Some local officials came up with novel ideas, such as encouraging party members to lead the buying spree.

“I hope that today all comrades will take the lead in buying property,” Deng Bibo, county party secretary in Hunan province, urged in a viral video this week. “Buy one property, then buy a second. If you already bought a second one, then buy a third one. Did you buy a third? Then buy your room.

Deng Bibo, county party secretary of China’s Hunan province, encouraged everyone to buy multiple houses during his opening speech at a real estate exhibition fair in Shimen, a county of Hunan.

Qian says that the real estate crisis is an example of the difficulty of maturing the regulatory system for a rapidly growing economy. Chinese watchdogs and lawmakers have long known that big real estate firms like Evergrande were borrowing heavily. It worked while the economy grew. But at some point the music stops.

Now China is trapped in a vicious circle. “The faster the slowdown, the bigger the problem,” says Qian. “The less confidence consumers have in the economy, the less willing they are to continue paying for incomplete homes and the bigger the problem. The faster the slowdown, the less confident consumers are.”

China’s internal problems also have an international dimension. What was once “the factory of the world” is now embroiled in geopolitical battles with many Western markets. Last month, Tony Danker, CEO of the Confederation of British Industry, said UK companies were already rethinking their operations in anticipation of the UK’s disengagement from China.

But perhaps the biggest elephant in the room in China’s economy today is politics, analysts say. In one of Li’s videos of her during her tour of Shenzhen, she was heard comparing China’s reform and opening up to “leaving a trail of blood.” But shortly after she was uploaded to Chinese social media, users began reporting that they could no longer see it.

“After user complaints and following platform examination, this video addressed current affairs and political content that I was not qualified to post,” the error message read.

Be the first to comment

Leave a Reply

Your email address will not be published.