Indian-American Congressman Raja Krishnamoorthi has hit the nail on the head with his recent observation that China is experiencing a dramatic slowdown in its economy and that Beijing has two paths going forward: continue with its aggression against its neighbours or reform its economy and reduce aggression.
As the ranking member of the U.S. House of Representatives Select Committee on Strategic Competition between the United States and the Chinese Communist Party, Raja Krishnamoorthi is an expert on the economic situation in China. The meaning of his observation is clear. Faced with a slowdown of the Chinese economy and unable to handle the domestic economic crisis, the mandarins in Beijing are trying to divert domestic public opinion by making warlike moves against India in the Himalayan region and against its neighbours in the South China Sea.
Only a market reform can save the Chinese economy from a deeper crisis; but this is easier said than done. President of China Xi Jinping, steeped in hardcore communist principles, is unlikely to take market-friendly steps.
“Essentially, China is experiencing a dramatic slowdown in its economy. It might be on the verge of deflation in certain sectors in the economy. Consumer confidence has vanished. Youth unemployment of upwards of 25 percent in a country with a one-child policy for decades is a very, very bad statistic,” Raja Krishnamoorthi has said in a recent interview. “It has racked up tremendous debt at the provincial and local level. People’s net worth, which is mostly invested in real estate, has fallen significantly.”
The National Bureau of Statistics of China has admitted that the Gross Domestic Product of China has dipped to 4.7 percent in the second quarter of the current financial year, well below the 5.3 per cent growth in the first quarter of the year. The economy posted a five per cent growth in the first half, within the range of the official growth target fixed for the year; but this is a far cry from the era of double-digit growth of the Chinese economy of yesteryears.
The International Monetary Fund last May painted a grimmer picture of the future of the Chinese economy. “China’s economic growth is projected to remain resilient at five percent in 2024 and slow to 4.5 percent in 2025,” First Deputy Managing Director of IMF Gita Gopinath said after the IMF’s annual review of the economic policies of China. Over the medium term, growth was expected to decelerate to 3.3 per cent by 2029 due to ageing and slower productivity growth.
A drop in the rate of economic growth, as the mandarins of the Chinese Communist Party know, will undermine the very foundation of their power. The common people of China will accept their autocratic rule only as long as they enjoy riding high on the wave of rapid economic growth.
The future does not look good for the Chinese economy. The heavily indebted local governments, which play a major role in the economy and are responsible for education, local infrastructure and local public services, have suspended transit services in multiple cities because they cannot afford to keep running them. In February 2023, the city of Shangqiu, home to more than seven million people, temporarily shut down bus lines. Luo Zhiheng, chief economist at Guangzhou-based Yuekai Securities, has been quoted as saying that China’s hidden local debt is estimated to be at $ 4.44 trillion.
China’s property sector, the dominant component of the Chinese economy, in the last few years has turned out to be its Achilles’ heel, causing widespread crisis. Many of the top builders have gone bankrupt. To prevent the collapse of its property sector, the Chinese government has now allotted billions of dollars to buy back unsold homes and repurchase idle lands to resurrect the bankrupt real estate sector of China; which once constituted the mainstay of its economic growth.
Economists are concerned that the autocratic methods of the Chinese government are discouraging the entrepreneurial spirit. The government has reined in China’s high-flying tech giants, such as Alibaba, the fintech and e-commerce giant. With the gradual worsening of relations with the United States, President of China Xi Jinping has pushed Chinese companies and universities to try to develop the high-end semiconductors and other technologies that are being blocked by the American restrictions on exports to China.
In the backdrop of this grim economic scenario, the Chinese Communist Party has just concluded a four-day meeting billed as the ‘third plenum,’ apparently to work out a new strategy for economic growth. While announcing the meeting, the politburo of the Chinese Communist Party spoke of the grim economic outlook facing China due to insufficient demand and uncertain external environment. Chinese enterprises were facing a difficult situation, home and abroad, it was stated.
Going by the reported outcome of the meeting, business owners and investors who had been watching if the party would announce any immediate measures to try to counter a prolonged real estate downturn and persistent malaise that has suppressed China’s post-pandemic economic recovery have been disappointed.
As the Voice of America has reported, “China’s ruling party has concluded the Third Plenum of its 20th Central Committee with a communiqué described as vague and cliché by China watchers who said it lacked specific measures to address China’s economic difficulties.” The idea of “Chinese style modernization” propagated by President Xi conveys no specific meaning. “It is like a philosophical article.”
According to a statement released by the party, the meeting ended with endorsement of policies aimed at building the country’s technological power and fortifying its national security. The agenda of the meeting focussed on strategies for self-sufficient economic growth at a time when China faces tightening restrictions on access to Western advanced technology, such as leading-edge computer chips and artificial intelligence.
On the other hand, foreign investors and markets were watching to see what the communist party would do to counter the slump in China’s real estate sector and weak consumer confidence that had hindered China’s recovery from the pandemic. They had been on the lookout for indications that the government would take any steps to create a more favourable environment for private companies.
The expectation has not been fulfilled that there will be some fine-tuning of policies to address concerns that increasing government control over business and society is stifling economic growth and that the outcome of the meeting will send a message to local government officials about the future direction of policy. The rising importance of national security has taken a toll on the economic growth of China. In a move that appears to be widening the definition of what constitutes a breach of the law, the government has even investigated companies that have transferred economic data overseas.
Analyst at the Mercator Institute for China Studies in Germany Alexander Davey has pointed out that the central government in China will have to do a trade-off between vast national resources poured into science and technological development which are areas considered to be vital for national security; and social services. The preference of the mandarins in Beijing seems to be for the former. With the Chinese economy faced with overcapacity due to insufficient demand, the U.S. and West European countries are concerned that to shore up its sinking economy Beijing will now make an attempt to dump Chinese products in markets abroad through non-market means like offering subsidies to Chinese companies. This will lead to the other countries protecting their own industries through tariff barriers. U.S. Under Secretary for International Affairs Jay Shambaugh has said: “We should be clear. Defence against overcapacity or dumping is not protectionist or anti-trade; it is an attempt to safeguard firms and workers from distortions in another economy.”