China’s economic recovery since lifting its zero-COVID policy appears to be a major disappointment. Data in the last month reveals record-high youth unemployment and shrinking credit demand. E-commerce companies sales numbers suggest low consumer spending.
Small businesses are struggling, and the government appears worried. The following piece draws on James Palmer’s article from the Foreign Policy magazine.
Even before the pandemic, the Chinese economy was slowing down. But today, public confidence is the biggest single factor in the faltering economy. After the last few years, people appear unwilling to spend and unwilling to take on new investments. COVID-19 lockdowns tested ordinary households’ savings—not only through income losses but also through delivery costs and price gauging as basic goods ran short. In 2022, household savings rose by 80% from the previous year; but that money isn’t being spent now.
Chinese market underperforms: Shanghai SE Index flat v S&P 500 + 20%
Source: FT
Compared to those in Western countries, small and medium-sized businesses in China received little financial aid, despite more severe restrictions. And while the Chinese government has pretended that the lockdowns never happened, they are burned into public memory. Although people may not fear lockdowns at this point, even amid another rise in COVID-19 cases in China, they are more aware of the power of the government to radically alter their lives.
The curtailment of once-major private enterprises has reinforced that message. Regulations in 2021 upended the private education business, causing thousands of layoffs. The government crackdown on video gaming led to 14,000 companies to close down. In the last three years, the Chinese technology sector has gone from a government darling to a perceived threat. All this just applies to domestic businesses; for foreign firms (and their many Chinese employees), the situation is even bleaker.
Geopolitical tensions between the US and China haven’t helped. People in the Chinese elite reportedly express a real fear that the US-China conflict could get bad enough to lead to war, or at least to a cold war, which would freeze trade on a much larger scale.
All of this has left people in China scared to take chances with their money. Ordinarily, that fear might lead them back into real estate, the main driver of the Chinese economy in the last two decades and a sector that makes up around 70% of Chinese investment. But with the ongoing property crisis, that isn’t happening.
China’s government is likely to respond to the economic downturn in a familiar way: with a stimulus package, cutting lending rates, and more support for the real estate sector. As economist Michael Pettis pointed out, that is not a great solution; it could only reinforce the problem. The government has repeatedly tried to reform the real estate sector, but it keeps backing off measures such as property taxes after public complaints.
The bigger problem is this: China’s decades of growth came when people were willing to take risks. A control-obsessed regime has left them more afraid of the future.
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