- China's post-pandemic rebound hasn't materialized and it faces mounting economic obstacles.
- Beijing is grappling with declining trade and foreign investment, a shaky housing market, and deflation.
The world's second-largest economy isn't growing, producing, or trading as much as it usually does.
The pandemic rebound that China and the rest of the world were anticipating has yet to materialize, and official data suggests there's a long road ahead before the economy is back on its feet.
China's National Bureau of Statistics announced Wednesday that consumer prices dropped annually in July for the first time in two years, dipping 0.3%, just slightly better than median estimates for a 0.4% decrease.
The People's Bank of China is now facing the opposite problem of the Federal Reserve, which has tightened policy for 18 months in a bid to tame soaring prices. Deflation — the trend of prices falling throughout the economy — presents a particularly dangerous trajectory for China, which carries a massive amount of debt.
"Deflation means the real value of debt goes up," David Dollar, a senior fellow at the Brookings Institute's China center, told Insider. "High inflation we know is bad, but it does help manage debt burdens over time. Deflation does the opposite."
Bloomberg estimates total household, business, and government debt at about 282% of annual economic output.
The latest figures add to the anxiety that's already been swirling about what growth could look like for the rest of the year, and JPMorgan strategists cautioned that China risks a 1990s-style "Japanification" if policymakers don't address the housing market, financial imbalances, and aging demographics.
Officials in Beijing have urged experts not to portray data unfavorably, according to the Financial Times, asking economists to "interpret bad news from a positive light."
The numbers make this difficult:
- Year-to-date, China's exports are down 5% compared to last year, while imports have dipped 7.6%
- Manufacturing activity has contracted for four straight months
- July exports declined at the sharpest rate in three years, at 14.5% annually
"Before the pandemic, China was growing at about 6%, and now it's struggling to recover," Dollar said. "Consumption really didn't hold up coming out of the lockdown. The main components of GDP on the demand side — consumption, investment, net exports — they all have serious problems right now."
Politicization of the economy
Increasingly, China's US-led Western trade partners have turned elsewhere. Global demand for Chinese goods has cooled, even as Russia ramps up trade with Asia amid its war in Ukraine.
The US Census Bureau reported Chinese exports to the US dropped 23.7% in June, hitting a six-month low of $42.7 billion. That reflects both the Biden Administration's "de-risking efforts," as well as a general pullback in spending as central banks around the world raise interest rates.
Near-shoring trends have also picked up since the pandemic. Mexico, for example, has emerged as America's new biggest trade partner, blowing past China with US bilateral trade totaling $263 billion through the first four months of the year.
Dexter Roberts, author of "The Myth of Chinese Capitalism" and a senior fellow at the Atlantic Council, told Insider that much of Beijing's troubles stem from its politicization of its economy.
Embedding Communist Party members in corporations and prioritizing state-run firms, he said, has dragged on domestic productivity, spooked the private sector, and made the country less attractive for foreign investment.
"A lot of companies now feel China isn't the market of the future," Roberts said.
To that point, China's foreign investment gauge plummeted to a 25-year low in the second quarter.
A shaky property market
Most of China's economic troubles tie directly into its property market.
China was able to skirt deflation in 2009 and 2012 on the heels of the global financial crisis, but today's housing market complicates policymakers' current battle.
Notwithstanding recent price declines, property values have appreciated dramatically since 2009, and fiscal stimulus measures may not have the same impact as before. China's allowed developers to over-build, and now the inventory glut has crippled major developers.
Last week, Country Garden Holdings — once China's largest developer by sales — failed to make millions of dollars' worth of coupon payments on its bonds, and it anticipates reporting enormous first-half losses.
Similarly in July, Chinese developer Evergrande, which made headlines in 2021 with a massive debt default, recorded a two-year $81 billion loss.
Real estate accounts for about one-fifth of the country's economy, and the sector's headwinds include hefty debt and weak demand from homebuyers. Home transaction volumes across 330 cities in China cratered 19.2% year-over-year in June, according to a Beike Research Institute study, and values have dropped 23.4%.
The slump helps explain China's weak second-quarter GDP, which came in lower than expected at 6.3%.
"Housing prices are going down, so people aren't making purchases," Roberts said. "So much of people's wealth is tied up in the property sector, so when they see values go down, they decide to save for the future and not spend. The Chinese government won't be able to lift the property sector without that confidence."
The long tail of China's one-child policy
Even if Beijing could somehow remedy its other issues, years of a one-child policy may have long ago crippled its economy for decades.
In 2022, the population shrank for the first time since 1961, and the consulting firm Terry Group said the country is on pace to lose nearly half its population by 2100.
But it's not just population decline that weakens China. It's the climbing proportion of elderly people.
In 1990, 5% of Chinese people were 65 or older. That's at 14% today, and could surge to 30% by 2050, per Terry Group. By their estimate, China could lose an average of 7 million working-age adults each year by the next decade.
Already, working-age couples have to support aging parents, education costs for children are climbing, and confidence in the economy is low.
For China to have a shot at improving demographic conditions, experts say Beijing will have to unwind its long-standing household registration system. The policy, which dates back to the 1950s, makes rural-to-urban migration unfavorable and difficult, as it ties social welfare benefits to where people are born.
Roughly a quarter of China's population works in agriculture — well above the 3% mark in the US — and that presents its own productivity limitations.
"I'm skeptical they'll do it, but if Beijing did away with household registration, it would mean a large portion of the Chinese population that's treated as second-class citizens would start to spend more, have more confidence in the future, and drive more productivity across the economy," Roberts said.
Rocky decade ahead
China's laundry list of issues point to a rocky decade ahead.
From an unstable, debt-ridden property market to anti-business policies and demographic issues, Beijing has plenty to tackle if it hopes to match the same growth as decades past.
Geopolitical hurdles involving the US, Russia, and other trade partners present further headaches for President Xi Jinping, but experts say the focus should be on domestic issues.
For Dollar, he expects China to eke out 5% growth this year, as Beijing forecasts, but without financial or demographic reforms, growth could hover closer to 3% for the next decade.