China’s debt is now nearly four times bigger than its GDP
After 40 years of explosive growth, China’s economy is now in deep distress — with no turnaround in sight. Here's everything you need to know:
What’s going wrong in China?
The country’s economy has hit a wall, ending the longest-running boom in history. Since the ruling Communist Party embraced Western-style trade, investment, and market forces in the late 1970s, China has doubled the size of its economy every decade. Some 800 million Chinese have been lifted out of poverty, and the once largely rural nation has been transformed into a manufacturing colossus and America’s only superpower competitor. But China’s economy is now decelerating sharply, with gross domestic product growing at 3% last year — dropping from 7.4% a decade earlier. Exports are sagging, consumer spending is down, private investment has dropped by a quarter since 2020, and fears of a deflationary spiral are rising. China’s debt is now nearly four times bigger than its GDP, and a burst housing bubble has left up to 80 million apartments unoccupied, threatening the savings of millions of Chinese who invested in the real estate market. “We’re witnessing a gearshift in what has been the most dramatic trajectory in economic history,” said Columbia University economic historian Adam Tooze. Young people have been hit especially hard by the slowdown.
How are young Chinese affected?
As companies have cut back on hiring, the urban unemployment rate for 16 to 24 year-olds has doubled over the past four years to a record 21.3%. Meanwhile, a record 11.6 million students graduated from college this summer into an economy that’s desperately short of high-paying, white-collar jobs. President Xi Jinping has said youth must learn to “eat bitterness” — a Chinese expression that means suck it up and lower your expectations. It’s a devastating blow for a generation raised to believe that hard work would yield success, and media stories abound about disillusioned youth who are “lying flat,” or opting out of the rat race. “They said our future would be bright and beautiful,” Yin, a 24-year-old medical student, told BBC. “But our dreams have been shattered.”
What’s driving the downturn?
It’s partly a consequence of Xi’s three-year “zero Covid” policy, which was abandoned in January. Months long lockdowns in Shanghai and other cities strangled production, led to mass layoffs, and spooked foreign buyers who relied on Chinese manufacturers to feed supply lines. But many of the country’s woes predated the pandemic. China for decades rode a wave of growth created by putting the rural poor to work in urban factories. But it failed to build a strong consumer economy, which could have picked up the slack when exports slowed and factories started moving abroad to poorer countries. Local governments also goosed the economy by constructing skyscrapers, highways, highspeed rail lines, bridges, and airports, but “they are running into diminishing. returns in building stuff,” said Harvard economist Kenneth Rogoff. Overbuilding has left parts of China saddled with unpopulated “ghost cities,” underused infrastructure — Guizhou, one of the nation’s poorest provinces, has more than 1,700 bridges and 11 airports — and piles of debt.
What is Beijing doing?
Not enough, say economists. Some argue that Beijing should strengthen the country’s weak safety net and embark on a stimulus program to shore up consumer spending and create jobs. But growing debt is an obstacle, as is Xi’s aversion to “welfarism” that he says breeds “laziness.” Beijing has invested heavily in the superconductor and electric-vehicle industries, and the latter is a notable bright spot; UBS analysts expect China’s share of the global auto market to roughly double to 33% by the end of the decade. But those sectors can’t lift the entire economy. Analysts say that in the face of economic woes Xi’s government has two choices: to expand economic opportunity or to ratchet up repression. They say it’s taken the latter path, which stands to worsen China’s plight by further stifling innovation and growth.
Are Xi’s policies harming the economy?
The president’s increasing authoritarianism appears to be deterring foreign investors, who spent $20 billion in China in the first quarter of 2023 — down from $100 billion in the same period last year. Many Western companies are worried about getting caught in the growing superpower showdown between the U.S. and China: Beijing banned semiconductors from U.S. chip firm Micron earlier this year and in April sent police to the office of U.S. consulting giant Bain & Co. At the same time, Xi has been waging a regulatory crackdown on Chinese Big Tech firms that might challenge his power. Reports from China now suggest a broad lack of con- fidence among citizens that their government can lead the way forward. “The most terrifying thing is that everyone around me is at a loss of what to do next,” said Richard Li, owner of a struggling auto-parts business. Such despair creates risks that go beyond China’s economy.
What kind of risks?
Masses of disaffected, unemployed young people pose a threat to an authoritarian regime, and Xi well knows it. Many experts fear that China’s growing woes could prompt more repression at home — and more aggression abroad. Efforts to change the subject could extend to invading Taiwan; in March, Xi called reunification with the island “the essence of national rejuvenation.” President Biden last month called China’s economic stumbles “a ticking time bomb” that should concern the U.S. “When bad folks have problems,” he said, “they do bad things.”
China’s shrinking population
On top of its immediate economic woes, Beijing is contending with a slower-burning demographic crisis that will have major implications for future growth. China this year recorded its first population drop since 1961; the U.N. estimates the country’s population will sink from 1.4 billion today to less than 800 million by 2100. That fall is largely a result of the one-child policy introduced by the Communist Party in the late 1970s to regulate population growth. Fears of a looming demographic collapse led authorities to relax that policy in 2016 and to offer cash incentives to new parents. But high housing costs and long working hours still discourage many young Chinese from having children. The fertility rate now stands at 1.09 births per woman, below the 2.1 needed to hold the population steady. China’s population is graying as well as shrinking, with the number of people age 60 and older expected to double to 500 million by 2050 — which could strain health and pension systems. Many Western nations are dealing with similar population problems. But China, said demographer Yi Fuxian, is unique in that it “has become older before it has become rich.”
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