In the space of four decades, the Chinese economy witnessed a historic transformation from an agrarian to an industrialized economy.
China’s unimpeded commercial rise may be in real jeopardy. After four decades of startling economic growth, the Chinese economy is slowing, and the soft patch is unlikely to be transitory.
The country’s once-booming property sector is facing a prolonged downturn, with several leading developers in serious trouble. Spillover from property markets to other areas of the economy is dragging growth below annual targets. Local and regional governments in China are deeply indebted, with a slowing rate of real estate activity depriving them of a major source of income. Chinese banks have seen a flood of bad assets in their property-loan businesses, with more likely to be reported in the coming months.
Households faced with increasing uncertainty have lost confidence and are spending cautiously. Property investments have been the main source of wealth generation for Chinese households, and the reversal of fortune in that sector is impairing consumption. Weaker domestic demand is driving up joblessness, pushing youth unemployment to a record high of over 20% this summer.
China will face demographic challenges for a long time to come.
The world will continue to decouple in 2024, with geopolitics becoming an increasingly important factor in economic developments. China will likely emerge as the biggest loser from the realignment, with domestic industries challenged by reshoring, “friendshoring” and sanctions.
Policymakers are expected to provide further support in the year ahead, but the room and willingness to go large will be constrained by excesses in the system today. Small incremental stimulus measures won’t be enough to lift household sentiment or incomes, while a large-scale fiscal stimulus will compromise ongoing deleveraging efforts. The People’s Bank of China has been going against the global tide by implementing a host of easing measures, but they will be of limited benefit in an economy that is loath to take on additional debt.
China will face demographic challenges for a long time to come. Birth rates are falling fast, resulting in the country’s population shrinking for the first time since the early 1960s. An aging and declining population will make the objective of becoming a consumption-driven economy a distant dream.
For a nation accustomed to a dazzling pace of growth, 2024 will likely feel recessionary to China. But this may be a necessary adjustment. A better economic outcome will not be more growth, but more sustainable growth. Coping with one to two years of relatively soft performance may be required to prevent China from experiencing a lost decade.
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