Winter is coming for China’s economy

The Chinese property downturn is yet to escalate into a full-blown financial crisis. If it starts, then we could see a domino effect across the Chinese markets and economy.

In 1979, China transitioned from an agrarian economy to a powerhouse dominated by service and industry, currently holding the position of the world's leading trading nation. From a meagre real per capita GDP of $156 in 1978, it boasts a real per capita GDP of $12,720 in 2022.

China's economic growth can be largely attributed to the country's adoption of market-oriented reforms and globalisation. The establishment of formal diplomatic relations with the United States in 1978 set in motion a virtuous cycle. This cycle gradually decentralised economic decision-making, elevated the market as a crucial mechanism for resource allocation, facilitated foreign investment, and substantially expanded international trade.

China's swift economic expansion has relied significantly on substantial borrowing, resulting in a considerable accumulation of debt, nearing 300 per cent of its GDP. The country has been actively working to transition its economy from dependence on exports and investment to a more balanced model emphasising domestic consumption and innovation. However, this shift has proven challenging, leading to diminished growth rates.

Even before Covid-19-related shutdowns, Chinese growth was faltering due to demographic challenges, a slowdown in the real estate sector, and a resurgence of State-led economic policymaking. The concentration of power has also contributed to a deteriorating relationship with China's Western partners, posing additional threats to the nation's growth prospects.

It has used its political might to curtail the influence of tech companies, particularly in the Chinese e-commerce, video gaming, and edtech space. This has had substantial consequences, including significant revenue losses and job reductions; importantly global investors were unnerved.

Well before the pandemic, the Chinese property market slowdown was around. The Covid-19-era conditions didn’t cause this structural crunch, but rather masked its inevitability. In 2022, Covid-19 was used to blame everything; in 2023, there is acceptance that China’s golden era is slowing. But with business investment still flat or negative due to the still-falling property sector, net exports declining and government spending constrained by shrinking tax and fee revenues, the full burden of delivering China’s forecast growth fell on household consumption.

Achieving the necessary consumption for driving GDP growth would necessitate government stimulus, yet fiscal measures have not been implemented thus far. Some attribute this to political reluctance, characterising support for households as ‘welfarism’. Despite Beijing's efforts to stabilise sentiment, foreign outflows persist, and Moody's Investors Service's extensive downgrade across China's sovereign and corporate ratings further compounds challenges.

The absence of social or political instability amidst the economic slowdown is likely attributed to China's authoritarian nature. Additionally, the property downturn is yet to escalate into a full-blown financial crisis. If it starts, then we could see a domino effect across the Chinese markets and economy. This same authoritarian aspect contributes to why foreign firms are departing China, private domestic firms are refraining from investments or new hires, and consumers are exercising caution.

In 2024, the global ramifications of China’s slowdown are expected to become evident. Advanced economies are anticipated to diminish the significance of market access in China, prompting the Global South to seek alternative engines of development. This signifies a shift in geopolitical conditions, retiring the assumption of a rising China and a declining US.

Beyond rebounding from pandemic-induced shocks and a substantial contraction in its construction sector, China’s economic reconstruction hinges significantly on how its political leaders navigate the internal political economy. Specifically, the extent to which the State retains a prominent role in economic decision-making and the dynamics between China and the US, along with other Western economies, will determine access to foreign technology, finances, and markets. Addressing these challenges necessitates a shift in political leadership towards market-oriented reforms, stepping away from the current centralised decision-making and top-down planned resource allocation.

Many Asian countries, once beneficiaries of Chinese growth, now grapple with economic consequences following China's slowdown. Sectors like tourism, shopping, luxury goods, and real estate are witnessing reduced demand from Chinese buyers. Hong Kong and Singapore, being trade and finance hubs, face heightened exposure to a weakening China. In Thailand, domestic political instability and decreased tourism from China have impacted economic growth. South Korea monitors China's economic situation closely, introducing measures to boost consumption. Australian companies, including miner BHP, are concerned about outlooks if China fails to stimulate growth. Malaysia's growth rate hit a nearly two-year low, reflecting the impact of the slowdown led by its primary trading partner.

India stands to benefit from the 'China plus one' strategy if Chinese exports decline. With many countries seeking alternatives to China in sectors such as electronics, pharmaceuticals, textiles, and automobiles, India can capitalise on this shift. Leveraging existing trade agreements and strategic partnerships with the US, Japan, Australia, and the European Union, which are also Chinese trade partners, India can enhance its access to global markets. The country can showcase strengths in IT, digital services, renewable energy, biotechnology, and defence production to attract foreign investors.

In areas affected by the Chinese slowdown, India has the potential to attract global investors for innovation and R&D, particularly in semiconductors, artificial intelligence, biotechnology, and aerospace.

(Srinath Sridharan is an author, policy researcher and corporate adviser. X: @ssmumbai.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.