The year 2023 is now over, marking the first year after China ended its Covid lockdown. However, the Chinese economy did not experience the robust recovery predicted by many at the beginning of the year for the post-pandemic era; instead, it entered a recession. While major economies worldwide are facing inflation, China is experiencing deflation. So, it is not cyclical. Major world economies have already begun to absorb the slowdown in the Chinese economy, and relevant adjustments have already started.
Looking at the basic indicators of the Chinese economy, the most burdensome factor is real estate. Real estate directly accounts for 11 percent of China’s GDP and indirectly 25 percent, dragging down a quarter of the national economy. (VIEW MORE from Shaomin Li: Evil Family Values)
So what about the overall data of China’s macroeconomy? First, let’s look at debt. China’s indebtedness is not as bad as popular belief. The central government’s debt is about 21 percent of its GDP. Local government debt is roughly between 50 percent and 80 percent of the GDP (including hidden debt). Of course, these are estimates based on publicly available data, and we know that China’s public data is unreliable. If we use a higher estimate, it can be said that these two together account for 110 percent of China’s total output. However, this is still relatively low; the federal government debt in the United States is 140 percent of the GDP, and Japan’s is 260 percent. Chinese banks are also relatively healthy. Their loans for mortgages constitute 40 percent of the total house value. In other words, the housing loan market would only be in trouble if house prices dropped by more than 60 percent. More importantly, individuals’ liability for mortgages is unlimited. This is different from the United States. In other words, in a debt crisis, banks are the first to bear the brunt in the United States, while in China, individuals are the victims. This is the advantage of the Chinese state and the plight of individuals in the Chinese Communist Party system.
The debt ratio of Chinese enterprises, including the less efficient state-owned and private enterprises, is not that high, except for real estate enterprises. The market value of Chinese enterprises is approximately 140 percent of China’s GDP, offsetting the 110 percent debt of the government and still having positive net assets.
Overall, the data on the Chinese economy is not that bad.
So where is the root cause of the economic decline in China? The main reason is the three-year lockdown and “zero-COVID” policy, which caused a significant economic loss and a profound loss of confidence. This can be seen from the extremely high savings rate (45 percent as opposed to 19 percent in the U.S.) and a large number of people paying off their mortgages in advance. All these are signs of reluctance to consume.
The root of China’s economic problems lies politically, in one-party rule. The Chinese Communist Party (CCP) is highly centralized, and the General Secretary has immense power, making authoritative decisions. If he comes up with the right policies, China’s economy can grow rapidly. If the wrong policies are pursued, the economy could be severely damaged.
There are two main measures the CCP can take to stimulate the economy. First is monetary policy, encouraging borrowing and consumption by lowering interest rates. Currently, China’s interest rates are low, and inflation has turned negative, indicating low consumer prices. However, people still lack confidence and are hesitant to consume or invest, so even lower interest rates are ineffective. (VIEW MORE from Shaomin Li: Shame on the American CEOs Who Dined With Xi)
The second measure is fiscal policy, where the government directly distribute money or invests. Compared to monetary policy, fiscal policy can more effectively stimulate consumption and investment. However, the Chinese government has not implemented large-scale money injection or investment so far.
Based on the above data, the Chinese government’s debt is not too high, and banks have sufficient capital, so there is policy space for the government to rescue the economy. However, why is the Xi Jinping government reluctant to intervene and rescue the economy? This is actually due to the system of one-party rule and high centralization.
Under one-party rule, the CCP’s primary consideration in the face of an economic downturn is to protect the central government’s interests and maintain a low debt ratio, while local governments, enterprises, and the people are secondary. To protect the central government, the CCP adopts a conservative monetary and fiscal policy and is unwilling to release funds. Observers believe that the central government’s idea is to bank on the resilience of individuals and businesses to weather the storm, and wait for the economic recession to go away.
A characteristic of the highly centralized model is that lower-level officials dare not speak freely because saying something displeasing to superiors might lead to losing their positions. Conversely, if they say what superiors want to hear, they may be promoted. This is why the top leaders are cautious in making statements, as any statement will be amplified through layers, potentially leading to loss of control at the grassroots level. In a situation where the people and entrepreneurs lack confidence, even if the central government hands out money, entrepreneurs and people may not invest or consume it, or they may save it, or transfer it overseas. This may be another consideration for the central government not wanting to intervene.
Recently, international media have widely noted that Xi Jinping did not fully attend the Central Economic Work Conference. He went on a state visit to Vietnam halfway through the conference, contrary to the usual practice of the CCP. Regarding this conference, I have the following observations.
All important decisions of the CCP are made behind the scenes; attending public meetings is just a formality. This time, there were no significant policy resolutions on economic rescue, so this conference was even less meaningful for Xi. We should also note that in recent years, the CCP has become increasingly indifferent to its international image. The CCP feels that it is already the biggest player, and it doesn’t care how the outside world views it. For example, Xi Jinping dismissed ministers without explanation, thinking that speculation and criticism from the outside are not important. (READ MORE: Why Has the CCP Banned Demonizing America?)
To be fair, this conference also has substantive content. The CCP admits that effective demand is insufficient, there is overcapacity, and social expectations are weak. This indicates that the CCP acknowledges that people lack confidence. Additionally, the CCP calls for stability — “stabilizing expectations, stabilizing growth, stabilizing employment” — with a total of six consecutive appearances of the word “stability.” This shows that the CCP’s main strategy for this economic recession is to preserve the CCP regime, not to stimulate the economy or help businesses and people.
If we liken the health of the Chinese economy to that of a person, the person’s various health indicators are okay, but their mind is confused, and confidence is lost. The central government is confused, so the people and private enterprises can only pray and run.
Therefore, in summary, there are two key elements to address this recession: first, the CCP needs to implement effective policies, and second, the people and businesses need to respond and regain confidence. Even if the CCP can accomplish the first point, the second point is still uncertain.
The CCP has been using the “carrot and stick” approach for many years. Many old private enterprise owners have already been scared off, but new, younger entrepreneurs are emerging. However, most of these new entrepreneurs are small businesses. As for starting large high-tech enterprises, the policy risks are too high, and the competition is intense, resulting in a very low success rate. Therefore, it is unlikely that the private sector will be willing to enter, and they may not have the conditions to enter.
Based on the above analysis, I believe that there will not be a significant turning point for the Chinese economy next year.
As for the global economy, the decline in China should not have a substantial impact. Major world economies have already begun to absorb the slowdown in the Chinese economy, and relevant adjustments have already started. Therefore, the spillover effects of China’s economic decline are not significant. Moreover, with China’s economy relatively slowing down, it should provide an opportunity for countries like the United States to adjust their strategies and reduce dependence on China.
Shaomin Li is Professor of International Business at Old Dominion University.
