China’s economy is in a grim place these days, far from the past when many journalists and politicians praised Beijing’s policies and spoke of that economy’s imminent dominance. Beijing just released a 5 percent real growth target for 2024, the same pace as last year. Much of the forecasting community is rightfully skeptical of whether that kind of growth is possible. A lot of skepticism remains over last year’s figure. Whether China hits the target or not hardly makes a difference. The important point is that 5 percent is only about half the growth pace averaged in past years. Something clearly has gone wrong.
Very little in Chinese economics has looked good since the COVID-19 pandemic of 2020. The nation’s population and, critically, its labor force are shrinking. A property crisis continues to weigh on building, home buying, and real estate values, and hence on the consumer as well as business confidence. China’s once-exuberant consumers remain reluctant to spend. Private businesses have reduced their levels of investment, expansion, and hiring. A huge overhang of questionable debt—from defunct developers as well as local governments that have long depended for revenues on real estate development—has hamstrung the ability of Chinese finance to support economic growth. Meanwhile, Western and Japanese businesses continue to diversify supply chains away from China, slowing the growth of buying and the flow of investment money into the country. Accordingly, Chinese exports—the economy’s mainstay—have suffered, and though shipments rose in the opening months of 2024, they remain anemic compared with past years. Meanwhile, governments in Washington, Brussels, and Tokyo have replaced their former support for Chinese development with open hostility.
In this sorry picture, there is plenty of blame to go around. China’s property developers were less than prudent in their use of debt and the locations for some of their projects. If American, European, and Japanese businesses had shown good judgment, they would never have created such a heavy dependence on China in the first place and would not have had to engineer a withdrawal. Washington, Brussels, and Tokyo should have known from the start that once China achieved sufficient development, Beijing would pursue its interests more aggressively. However, for all the mistakes of others, most of the blame for China’s problems belongs to the nation’s leadership in Beijing.
Take China’s demographic problem. Birth rates have been so low for so long that China lacks a sufficient flow of young people into the workforce to replace the large numbers now retiring. A limited workforce has already constrained production potentials and will do so increasingly for some time to come. This is very different from China’s gloried economic past. When China first opened its economy in the late 1970s, the country had an abundance of working-age people eager for gainful employment. In no small respect, this demographic reality powered the economy’s astounding growth of almost 10 percent a year, year after year. But with this age cohort retiring and few replacements, the older, favorable demographic has turned on its head.
Though much of the developed world faces the same problem, China’s situation is especially severe, largely because of Beijing’s policies. When the country first opened to the world, then-President Deng Xiaoping wanted to free up as much of the labor force as possible. To relieve potential workers from family obligations, he promulgated the “one-child policy,” effectively making it a crime for a family to have more than one child. It worked for economic growth for a long while, but Deng failed to consider its long-term implications. His policy lies at the root of today’s severe shortage of young workers. In recent years, Beijing has recognized the problem and rescinded the one-child rule. However, after years of dominating family decisionmaking, it has become part of Chinese culture. The recent change in the law has produced no increase in Chinese fertility rates, which continue to fall. Even if it did raise fertility rates, it would take fifteen to twenty years to make a difference in China’s available workforce.
Another policy error has compounded this demographic problem. Since the future of high technology demands a highly educated workforce, China has poured funds into higher education for years. It graduated engineers and scientists at such a rapid rate that American commentators routinely point to the figures with quavering voices and fearful eyes. Had China also adjusted its economy toward services, it would have worked well. But that did not happen. Instead, China’s economy continues to depend in no small measure on lower-skilled and low-technology products. Assembling iPads does not require a degree in electronic engineering, and certainly, neither does making shirts for the American market. Because of this, China, while suffering a labor shortage in manufacturing, also faces a surplus of college graduates. Today in China, factory owners go begging for workers, while the country records a nearly 20 percent youth unemployment rate. The rate is so embarrassing that Beijing has discontinued publishing such statistics.
Policy failures also surround the severity of the country’s property crisis. These began quite some time ago when Beijing enthusiastically encouraged residential development, pushing local governments to get involved and providing easy credit for developers and homebuyers. Because China had a housing shortage in the late twentieth century, this policy seemed well-founded. But Beijing carried on with it even after the housing stock had caught up with the nation’s needs. At its height, residential real estate development amounted to an astronomical 30 percent of the economy. Developers, following Beijing’s lead, became ever more leveraged and pursued projects in dubious locations. Then, in 2020, Beijing abruptly removed the support, so fast, in fact, that neither developers nor homebuyers had time to adjust. Failures were inevitable. They began in 2021, with the announcement by the giant developer Evergrande that it could not service its some $300 billion in liabilities.
In response to this emergency, Beijing did nothing, and so the crisis metastasized. The growing overhang of questionable debt left Chinese banks and other financial institutions unable to support new investments in any area of the economy. With millions of homebuyers who had prepaid apartments that were never constructed, more bankruptcies ensued. Confidence throughout the household sector cratered. Few were willing to put money at risk, buying rates fell, and with the drop in demand, so did real estate prices. The damage that declining property values did to household wealth depressed confidence and, with it, anyone’s willingness to spend. By the time Beijing finally acted late last year, some twenty-four months after the problems first became evident, the remedies they offered were far from sufficient to address a problem that had already festered for years.
Nor are these policy mistakes, severe as they are, all that Beijing has done to screw up China’s economy. Its zero-COVID policy exacerbated much that was already wrong. That policy kept China under lockdowns and quarantines long after the rest of the world began its recovery from the pandemic. Indeed, Beijing waited until early 2023 before it lifted severe restrictions on productive activity and on the movement of people and goods. These restrictions’ legacy has left households less confident than ever in the security of their finances and incomes and made them even more reluctant to consume than they were, much less make an investment in a new home. Private Chinese businesses, too, have lost confidence in the future and cut back on any expansion plans. It did not help that Xi Jinping, during the lockdowns, went out of his way to denigrate private business owners for following the interests of their firms instead of those of the Chinese Communist Party. Xi, now desperate to get the economy moving, has since changed his tune, referring to these business owners as “our own people,” but the damage was done.
The shutdowns also disillusioned Japanese, American, and European businesses about sourcing from and investing in China. Earlier in China’s development, businesspeople all around the world not only saw the attraction of low Chinese wages but also the reliability of Chinese operations. They met the terms of the contracts and delivered on time. Attitudes had begun to change even before the pandemic. Beijing’s insistence that foreign firms operating in China had to have a Chinese partner to whom they had to transfer technologies and trade secrets began to chafe increasingly. Chinese production and sourcing also lost appeal due to its reputation for bullying. Beijing has resorted to punitive tariffs on unrelated issues. It imposed severe duties on Australian goods in retaliation for Canberra’s questions about the origins of COVID-19. It Beijing threatened to cut off supplies of rare earth elements to Japan over a sovereignty dispute in the East China Sea. On top of these irritants, the seemingly arbitrary shipping interruptions greatly reinforced doubts about the once-revered reliability of Chinese sourcing.
Beijing also played its cards wrong with Washington, Brussels, and Tokyo. Not too long ago, China had considerable goodwill with all these nations. There was widespread support for Chinese development. It was thought that it would bring China into the community of nations as a positive economic and diplomatic influence. Had Beijing resisted the impulse to bully and use its blunt power at every turn, it might have kept that goodwill for longer. However, having reached for its guns and shown no interest in compromise with any of its trading partners, China has generated considerable hostility in all these capitals. Tokyo is leading a joint effort of G-7 nations to procure rare earth elements outside China. Brussels is seeking penalties against China for dumping underpriced products on European markets. Washington has blocked China’s trade in high-technology items and has forbidden American investments in Chinese technology. None of this helps China’s economic prospects.
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