- Suranjana Tiwari
- Asia Business Correspondent
image source, Getty Images
China’s economy has been in decline due to the severe restrictions imposed to control the corona virus and the weakening of global market demand.
China’s official quarterly growth data for July to September is expected next week. Accordingly, if China, the world’s second-largest economy, continues to decline, the country’s chances of heading into recession will increase. With China falling short of its 5.5% annual growth rate target, government officials have downplayed the need to meet the target. Growth in the April-June quarter escaped a slump in China’s hair growth. However, some economists do not expect any growth this year.
Although China is not facing the same high levels of inflation as the United States and Britain, China has other problems, including a sudden decline in domestic and international demand for its products. Trade tensions between China and other major economies, including the US, are also hampering growth.
Also, China’s yuan has suffered its worst decline in decades against the U.S. dollar this year. Due to this, uncertainty has increased in the economy as investors have become fearful. Also, this has made it difficult to spend money from the central bank for economic development.
Unprecedentedly, China’s economy is in a slump at a time when Xi Jinping is expected to be approved for a third term as president at the Communist Party of China Congress, which begins on October 16.
Where did it go wrong?
1. Losses due to zero covid policy
Due to the coronavirus pandemic in several manufacturing hubs, including Shenzhen and Tianjin, economic activity has been affected across industries.
Also, people are not spending money on food and beverages, retail, tourism, etc., thus putting critical services under pressure.
In terms of manufacturing, factory activity accelerated in September, the Office for National Statistics said.
Manufacturing is experiencing a rebound as government spends more on infrastructure.
But this has happened after two months of no growth in production. Also, factory activity fell in September as demand for manufactured goods, new purchases and employment were hit, a private statistician said.
Due to high interest rates, inflation and the war in Ukraine, manufacturing demand has also fallen in countries including the US.
While experts agree that China can do more to get the economy on the growth track, they can’t until zero Covid restrictions are in place.
“Unless businesses are growing or people are spending money, there is no point in spending money from the central bank on the economy,” says Louis Quiges, chief Asia economist at S&P Global Ratings.
2. Chinese government not taking necessary measures
The Chinese government announced a 1 trillion yuan plan last August to promote small businesses, infrastructure and real estate.
But authorities could have done more to meet growth targets, create jobs and boost spending.
image source, Getty Images
These include more investment in infrastructure, easing of borrowing restrictions for home buyers, realtors and local governments, and tax breaks.
“The government’s response to the recession has been modest compared to what was done when the country was in recession,” Kuijs says.
3. Chinese real estate market in crisis
Decline in real estate and negative sentiment in the housing market undoubtedly dampened growth.
This has hit the economy hard, as sectors including real estate account for a third of China’s GDP.
“When confidence in the housing market weakens, people feel uncertain about the overall economic environment,” Kuijs says.
Homebuyers are reluctant to pay mortgages on unfinished buildings, some suspecting that their homes will never be completed. Demand for new homes has fallen. As a result, the import demand for construction materials has decreased.
Home prices in more than 10 cities have fallen by more than 20 percent this year, despite efforts by the Chinese government to stimulate the real estate market.
Analysts say the authorities need to do more to restore confidence in the market as the real estate industry comes under pressure.
4. Climate crisis which worsened the situation
Extreme weather events are beginning to have a long-term impact on China’s industry.
In August, severe heat waves, followed by drought, hit the southwestern province of Sichuan and the central region of Chongqing.
Thus, while the demand for ACs has increased, the demand for electricity has increased in areas that depend on electricity generated by hydroelectricity.
As a result, major manufacturing companies such as iPhone maker Foxconn and Tesla were forced to reduce production hours or stop production altogether.
Profits in the iron and steel manufacturing industry alone fell more than 80 percent in the first seven months of 2022 compared to a year earlier, China’s Bureau of Statistics said in August.
This was followed by a government bailout with tens of billions of dollars to save energy companies and farmers.
5. China’s tech giants losing investors
Control measures to regulate China’s tech giants have dragged on for two years with little progress.
Companies including Tencent and Alibaba posted their first ever loss in revenue in the latest quarter. Tencent lost 50 percent of its revenue, while Alibaba lost half of its total revenue.
image source, Getty Images
Thousands of young workers lost their jobs. The crisis came when one in five 16- to 24-year-olds was unemployed. This will affect China’s production and growth in the long run.
Investors are also aware of this change. Some of China’s most successful private companies are coming under increased scrutiny as Xi Jinping’s power grows.
Foreign investors are pulling back as the state appears to be in favor of state-owned enterprises.
Japan’s SoftBank withdrew a large investment from Alibaba. Also, Warren Buffett’s Hathaway Company is selling its stake in electric vehicle maker PTY. In the second half of this year alone, Tencent has reinvested more than $7 billion.
Also, the US is taking tough measures against Chinese companies listed on the US stock market.
“Some investment decisions have been postponed, and some foreign companies are taking steps to expand their production in other countries,” S&P Global Ratings said in its latest report.
The world is getting used to the fact that China will no longer be the major industrial hub it used to be. But Xi Jinping is risking the economic success that has bolstered China in recent decades.
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Source: BBC.com