Question:  

Is China’s economy in bad shape?

Answer: 

There is speculation about China’s economic “decline” or potential economic “perils,” including newspaper articles about the coming demise of China’s miraculous economic growth over the previous decades. 

The talk of China’s economic decline has hit the Chinese Communist party hard, so hard that even the Chinese Ambassador to the U.S. had to intervene and write an opinion piece in the Washington Post (The Chinese economy is doing better than you might think, by Xie Feng, August 30, 2023). The job of a diplomat is to promote their country, so we aren’t going to take time to analyze what the ambassador said in that piece.

It is worth remembering China’s “glory days” when economists argued that Chinese officials were fibbing about growth rates of more than 10% per year. Now the problem is reversed and there’s doubt about statistical reports from China. One sign is the Chinese government’s decision to stop reporting the rate of unemployment for young Chinese unemployment for a segment of the population that continues to increase. It is never a good sign when a government decides to not publish a data series because it does not serve its purposes.

However, the biggest issue the Chinese economy faces today is that the development model they chose for fast growth has probably run its course and they will need to adapt to the new realities. The development model has followed what economist Arthur Lewis called “unlimited supply of labor,” which meant that the Chinese economy could draw an unlimited supply of labor from its agricultural sector – which has low to negative productivity – into the industrial regions and keep wages relatively low, while experiencing a significant increase in productivity in the industrial sector.

At the same time, the country pursued a policy of subsidies benefiting several exporting sectors while it also built an immense infrastructure across the country. This process was followed by a large push to build new cities and buildings that would accommodate this internal migration. However, this process slowed to a trickle and the country has been facing an infrastructure spending slowdown, along with home overbuilding all contributing to the slowdown in economic activity.

At the same time, the Chinese aren’t huge consumers, unlike other economies across world. While there has been improvement lately, the Chinese invest about 42% to 44% of Gross Domestic Production (GDP) while personal consumption as a percentage of GDP stood at close to 38%. In the rest of the world, investment as a percentage of GDP is closer to 15-20% while personal consumption as a percentage of GDP is closer to 60-70%.

However, for China, bringing up the rate at which its population consumes has been more difficult than expected. Some argue that the “one-child” policy implemented in 1979 has pushed Chinese citizens to be very frugal and to save a larger amount of income because they cannot depend on many children to take care of them in their old age. Others say that China doesn’t have a welfare system for the elderly that will reduce the need to save so much during an individual’s lifetime. Whatever the reason for such a low rate of consumption as a percentage of GDP, it continues to be one of the biggest issues that will continue to constrain the ability of the country to grow as the investment-export-led economic growth model of the past continues to face strains.

Finally, although the Chinese government has changed its “one-child” policy twice during the last several decades and now encourages families to have up to three children, the fact is that Chinese families do not have more children, and thus the Chinese population has started to fall. This will add to the economy’s pressures because the labor force will also start to come down and affect the ability of the economy to perform going forward.

In summary, yes, the Chinese economy has issues, but these issues are not insurmountable. However, some of the current trends are not easily reversed and thus these issues will continue to limit the ability of the Chinese economy to grow at a faster pace going forward. Stay focused and plan accordingly.