Searching for China’s growth anchors
The Chinese economy is struggling to get its growth back to its pre-pandemic average of above 6 per cent despite piling government and consumer debt weighing down economic activity.
China’s real property sector remains in crisis mode as several big players have turned insolvent over the past year, unable to pay maturing debts after the central government tightened the rules to prevent an asset bubble.
Initially, the government said no bailouts will be given to developers, but it softened its stance in April with an announcement of planning for local governments to buy unsold homes from property firms in an attempt to inject liquidity towards the ailing housing market. These units will later be offered to citizens as low-cost housing. This, however, would add to the mounting debt burden of the state. Public debt has been on a steady ascent since 2011, although the biggest jump was seen in 2020 as the government was forced to undertake emergency spending for health and economic interventions due to the COVID-19 crisis.
China’s public debt burden grew from 60.4 per cent of GDP in 2019 to 83.6 per cent of GDP by end-2023, as seen in Graph 1. The International Monetary Fund (IMF) expects China’s general government debt to accumulate in the next five years to 110 per cent of GDP by 2029 while accompanied by an even slower economic growth of 3.3 per cent. This trend deviates from forecasts for other developing economies which are projected to unlock faster GDP expansion along with lower government debt levels.
China’s debt woes will grow only heavier in the next year given the government’s plan to buy unsold homes to rescue ailing property developers. Selling these residential units for cheap to mainland residents won’t be easy either as household debt is already at an all-time high of about 63 per cent of GDP, leaving little room to make big-ticket purchases like a new house.
China’s economy expanded by 5.2 per cent in 2023, improving from 3 per cent the previous year, although far from potential. The property sector contributes at least one-fifth of China’s GDP, and with its immediate recovery appearing out of reach, China’s 5 per cent economic growth target for 2024 could be at risk. Instead, the IMF forecasts the Chinese economy to expand by a softer 4.6 per cent.
Policy reforms
The central committee of the ruling Communist Party said it will seek to defuse risks emanating from the property sector and heavy local government debt during its July 15-18 meeting. The third plenum meant to explore strategies to navigate the Chinese economy out of this slump. The party is acting with urgency: usually, this annual meeting on economic policies occurs in October or November.
China’s policymakers reiterated their strategies to secure long-term growth through investments in infrastructure, technology and innovation as well as by opening more to the global market. However, no clear pronouncements have been made as to how the Chinese government will contain the bleeding real estate sector and the government’s piling debt – in fact, both issues were only mentioned once in the communique.
China must plot its next moves wisely: weak global economic activity due to high interest rates has depressed the demand for Chinese exports, restraining the economy from growing faster and leaving fewer public resources for its needs. Weak external demand for exports also means businesses and consumers have less to spend and have reduced capacity to settle their own debts.
Beyond state purchases of unsold residential units, questions remain on how cash-strapped Chinese developers can finish delayed construction projects, if – and how – they could sell these units upon completion, and where local governments will source the funding for acquiring these unoccupied homes. Relying on more borrowing would further pad public debt levels and raise greater alarm about China’s fiscal position.
US tariffs
China’s domestic debt concerns are aggravated by additional tariffs imposed by the US on Chinese goods.
In May, the US government announced that USD 18 billion worth of Chinese imports are subject to higher duties supposedly to counter Beijing’s “unfair trade practices” of flooding the global market with artificially cheap products such as steel, semiconductors, and electric vehicles (EVs) and batteries. Tariffs have been raised from single-digit rates to 25 per cent for most goods, while duties on China-made EVs have been quadrupled to 100 per cent from 25 per cent to shield American producers from losing out to Chinese goods.
China is facing a moment of déjà vu as in 2018 when former US President Donald Trump also slapped higher tariffs on Chinese products which sparked the ongoing US-China trade war. Indeed, the Chinese economy saw slower growth that year, but so did the US and the rest of the globe. There is no winning side to this trade war, and this might worsen the situation should China decide to retaliate with tariff increases.
Goods exports
Manufacturing output remained sub-optimal as China’s Purchasing Managers’ Index (PMI) reading is consistently below the 50 level, indicating that local factories are operating quantities below full capacity until at least end-July.
Over the past year, the PMI score only touched the 50 threshold for three months, meaning producers were unable to establish momentum for their production. Further, Graph 2 shows that the value of Chinese exports in the first five months of 2024 has declined relative to previous years.
The guided depreciation of the yuan against the US dollar will give exporters a much-needed boost for Chinese manufacturers to gain steam, and this could be the nudge that the economy needs to get back to its robust growth path. After all, manufacturing still contributes about 26 per cent of the country’s GDP according to the World Bank. This could boost corporate and consumer confidence –– and, in turn, lead to higher incomes and greater public and household spending to save China’s ailing economy.
