Can China Get Its Economy Back on Track in 2024?

China’s disappointing recovery after COVID has raised significant doubts about the foundations of its long-standing remarkable growth. This has left Beijing with a tough choice that boils down to two options – borrowing to stimulate growth or accepting slower economic growth, writes Reuters.

China had expected that after discarding draconian rules during the pandemic, people would return to shopping malls, foreign investments would continue, and the shaken real estate market would stabilize. However, instead, Chinese consumers are saving for rainy days, foreign companies are pulling their money out, manufacturers are facing declining demand from the West, and the real estate market remains in disarray.

Misplaced expectations have partially vindicated those who have always doubted the Chinese growth model, and some economists even draw parallels with Japan’s bubble before its ‘lost decades’ of stagnation that began in the 1990s.

Chinese skeptics argue that Beijing failed to transition the economy from construction-led development to consumption-driven growth a decade ago when it should have. Since then, debt has outstripped the economy, reaching levels that local governments and real estate companies now struggle to service.

Policymakers have promised to stimulate consumption this year and reduce the economy’s reliance on the real estate sector, prompting Beijing to urge banks to lend more to high-end manufacturing and move away from real estate.

But a concrete long-term plan for debt cleanup and economic restructuring remains elusive.

Whatever decisions China makes, it will have to explain the aging and shrinking population and the difficult geopolitical environment as the West becomes cautious in dealing with the world’s second-largest economy.

National Pessimism

China likely grew by five percent in 2023, outpacing the global economy. However, beneath that lies the fact that China invests more than 40 percent of its output – double that of the United States – suggesting that a significant portion of this is unproductive. This means that many Chinese do not feel that growth. Youth unemployment exceeded 21 percent in June, the last unemployment data available as China subsequently stopped reporting.

In an economy where 70 percent of household wealth is parked in real estate, homeowners feel poorer. Even in one of the few bright spots of the economy, the electric vehicle sector, a price war is causing problems for suppliers and workers.

National pessimism could pose risks to President Xi Jinping regarding social stability, analysts say. If China slips into a downturn like Japan, it will do so before achieving the development that Japan attained. This would be widely felt as most global industries heavily rely on suppliers in China. Africa and Latin America count on China to buy their goods and finance their industrialization.

China’s problems give it little time before it must make some tough decisions. Policymakers want to change the structure of the economy, but reforms have always been difficult in China. The pressure to increase prosperity for hundreds of millions of rural workers, who could – according to some estimates – add 1.7 percent to GDP in household consumption if they had similar access to public services as urban residents, is already stalled due to concerns about social stability and costs.

China’s efforts to address its property and debt issues face similar concerns. Who pays for their bad investments? Banks, state-owned enterprises, the central government, businesses, or households? Any of these options could mean weaker future growth, economists say.

For now, however, it seems that China is hesitant to make decisions that would sacrifice growth for the sake of reforms. Government advisors are calling for a growth target of around five percent for next year. While this aligns with its target for 2023, it will not have the same flattering year-on-year comparison with the decline caused by isolation in 2022.