Recent economic difficulties in China suggest that something is gravely wrong.

Recent economic difficulties in China suggest that something is gravely wrong.

Recent economic difficulties in China suggest that something is gravely wrong. China’s leaders described this year’s economic recovery as “torturous” during a Politburo meeting last month. Rarely will you hear such honesty from a Chinese Communist party institution, let alone a body of such stature. They were referring to current conditions, but China’s problems disclose that its economic and political system is fundamentally flawed.

Some of the statistics published by China in recent days have caused a commotion. Consumer prices in July were lower than a year ago, indicating that the economy may be on the verge of deflation due to a chronic lack of demand. In the same month, China’s foreign trade showed a sharp decline in exports due to a poor global market, with an even more substantial decline in imports indicating weak domestic demand. Both were affected by murky factors, but the message is that China has a more severe problem.

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It was widely anticipated that China would recover from the pandemic, and there was a flurry of activity in early 2023. Nevertheless, private investment, the linchpin of China’s economy, declined in the first half of this year for the first time since these statistics were published many years ago.

Private companies and proprietors spend little on investment and employment. The youth unemployment rate has surpassed 21%, double that of the UK and nearly three times the pace in the United States. The annual graduation of 11-12 million students in the summer exacerbates an already difficult situation due to the difficulty of finding suitable employment and the fact that the Chinese labor market has become dominated by lower-paying, low-skill, gig, or informal economy jobs as opposed to higher-quality manufacturing and construction jobs.

However, it would be incorrect to attribute everything to the pandemic. The majority of factors weighing on China’s economy have been accumulating for several years, even as the majority of the world was impressed by China’s global brands such as Huawei, Alibaba, Tencent, and TikTok, real estate was booming. China was leaving its footprint all over the world through the “belt and Road” initiative and its rising governance engagement with global organizations such as the International Monetary Fund and the World Health Organization.

Despite its undeniable achievements and successes, China has produced a mountain of bad debt, unprofitable and uncommercial infrastructure and real estate, empty apartment blocks and underutilized apartments and transport facilities, and excess capacity in industries such as coal, steel, solar panels, and electric vehicles over the past decade or more. China has one of the world’s highest levels of inequality, and development in productivity has stalled.

It is aging quicker than any other country in the world. Still, its social security system is so inadequate that most 290 million migrant workers are not eligible for social benefits. In addition, under Xi Jinping, China has developed a more repressive, state-centric, and controlling governance system for political reasons and to address the effects of its failing development model.

These are trying times for Chinese citizens, particularly the fabled rising middle class, whose savings have been mainly invested in a bloated real estate market that has now entered a structural decline. Most housing stock, overbuilding, transaction collapse, and price weakness are not in major cities like Beijing, Shenzhen, and Shanghai but in hundreds of smaller towns and villages that rarely make the news.

This year, China’s leaders have been vocal about bolstering consumption and improving the business climate for private firms and entrepreneurs, who have been compelled or punished to align their commercial interests with the party’s political objectives. We have yet to see proof that such rhetoric has substance.

In the coming weeks and months, the government will likely relax its financial and budgetary policies, housing regulations, and borrowing limits to fund infrastructure. Some measures may appear consumer-friendly but fail to increase the income needed to sustain a higher consumption level.

These factors may provide a transient boost to the economy during the winter. Still, the underlying weakness of the economy and China’s increased authoritarianism appear irreversible, at least for now.

It is debatable whether this type of China in the 2020s poses a more significant threat to geopolitical stability than a China that confidently strides the world stage, can dismiss liberal-leaning democracies, and reshapes global governance in its favor. However, it is crucial to get it correct.

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