China’s Economic Crisis: What’s Wrong With Chinese Economy?

In recent times, the world has witnessed a shift in the economic landscape of the dragon country. You know what we are talking about. Our neighbor China!  Once it was known for being an unstoppable force driving global growth. But now the Chinese economy is grappling with a series of challenges that have raised concerns on a global scale. This transformation prompts a critical inquiry into the factors contributing to China’s economic crisis.

From mounting debt to shifting demographics, this intriguing situation underscores the complexities of sustaining rapid growth in a vast and diverse nation. Doesn’t your curiosity stir after observing this fact?

If yes, then stick to this write-up where we will delve into the intricacies of the factors that are ailing the Chinese economy. Also, you will get valuable insights into the broader dynamics of global economics.

Let’s begin!

Synopsis: What’s Wrong with the Chinese Economy?

In the mid of August 2023, the value of the Chinese Yuan fell to its lowest level in the last two decades. In July 2023, the value was $1= 7.269 Yuan. This prompted the Chinese central bank to use its biggest move to defend its currency on record. How? By setting a much higher rate to the dollar than the estimated market value! This red flag was enough to signal the ongoing China’s economic crisis.

But that’s not all. If you observe the timeline carefully, then you will see China’s steep economic decline. And that too despite having a remarkable start in the year 2023! In simple words, China’s growth faced a steep downfall and it is still continuing.

Let me give you some brief insights into the economic tornado that China is facing.  The growth stalled despite the end of Covid lockdowns. We all are aware of the disastrous impact of Covid on the globe in terms of health, inflation, and economic crisis. The current situation seems as if the Covid-19 origin country is getting the taste of its own medicine!

The consumer prices are falling, the real estate crisis is shaking up the Chinese government to its core. The shrinking exports and falling investments are piling up disappointing economic data. 

And most importantly- Unemployment! 

The unemployment and job crisis among Chinese youths has hit rock bottom. It is such a huge issue that even the government stopped publishing data about it. Reason? To save itself from global and public backlash!

The list doesn’t end here. But the question is- How did China land in a devastating economic crisis? Obviously due to the underlying factors. And what are they? Go through the next section to find it out!

Factors that led to China’s Economic Crisis

China’s remarkable economic growth over the past few decades has been the envy of the world. However, beneath this success lies a complex web of factors that have contributed to its recent economic challenges. From mounting debt and overleveraging to demographic shifts and trade tensions, the interplay of these elements has triggered concerns about China’s economic stability and its implications on the global stage. 

Let’s delve into these factors to gain a deeper understanding of the forces shaping China’s economic crisis-

1. Negative Impact of Zero-Covid Policies

China’s covid-elimination strategy (within its borders) was not only disastrous. But it also became one of the potent root causes of China’s Economic Crisis. Its policy of Zero-Covid Strategy involved frequent lockdowns, forceful home-stays, travel restrictions, and mass testing. Even the health professionals worked tirelessly in spite of being Covid positive themselves. What a sad story! 

The Zero Covid Policies tightly slapped the three main segments of China-

• Manufacturing
• Supply Chain
• Logistics

The tourism and hospitality sector was affected too! You must have heard the news about the shifting of manufacturing hubs from China to Vietnam and India. Some of the notable Companies are-

Note: We have already covered “Foxconn’s $700M investment in India.” You can visit the article for more details.

What were the disastrous results of China’s Zero Covid Policies?

The disheartening results for China are described in the data described in the table below-

Thus, the implementation of strict Zero Covid policies in response to the pandemic has wreaked havoc on the Chinese economy. These policies have led to disruptions in manufacturing, supply chains, and logistics, causing a decline in economic activity.

2. Property Market Crisis

Do you know how important the housing sector is? Especially for China. It contributes nearly 30% of China’s GDP. We can’t deny the fact that China is blessed with vast land. The country brilliantly & aggressively utilized it for making money! It saw the land as a source of capital development, therefore, centralized the whole real-estate market.

So how is the real estate market affecting China’s economy?

See, China’s real estate market is governed by a central government. The land in urban and rural China is owned by the State Municipality and Collective respectively. It restricts the local government and people from investing in real estate. As a result, China saw a drastic decline in property prices after the Covid-19 pandemic.

During Zero-Covid restrictions, people were locked into their apartments and helplessly watched the 20% decline of the property market in the news.

Three Chinese companies that initiated the real-estate crisis are-

• Country Garden (China’s largest property sales developer)
• Zhongrong Trust (a top trust company)
• Evergrande Group (Chinese Real Estate Company that filed bankruptcy)

Even now, China’s property market is experiencing a significant crisis. High levels of debt, oversupply, and restrictions on home purchases have contributed to a decline in the real estate sector. This downturn has had ripple effects throughout the economy, as the property market plays a crucial role in China’s growth.

3. Piled Debts

World’s second-largest economy is heavily piled with debts. Sounds quite sarcastic. Isn’t it? But do you know an interesting fact?  China’s exponential economic growth in the last two decades was fueled by heavy borrowing.  This led to a significant buildup of debt in the Chinese economy.

Yes! The dragon country with the expertise of debt-trapping diplomacy is itself piled with debts. That’s quite ironic.

As of now, China’s debt is estimated at 282% of GDP. It is way more than that of the US i.e. 122.8%.

Thus, the high debts limited the Chinese government’s ability to stimulate economic growth.

4. Low Consumption, Investment, and Consumer Spending

Due to the uncertain economic environment, Chinese investors and households are refraining from spending. This led to a deflationary condition. The falling consumer prices are hampering domestic demand and economic recovery. 

How do low consumption, reduced investments, and less consumer spending cause economic crises? You may wonder.

These three factors collectively trigger economic crises by creating a vicious cycle. 

Low consumption means less demand for goods and services, leading to production cutbacks and job losses. The low investment further weakens economic growth, impacting job creation and technological advancement. Reduced consumer spending exacerbates the problem, as it perpetuates declining demand.

This cycle results in shrinking economic output, rising unemployment, and lower government revenue. 

Ultimately, the economy contracts, causing a recession or depression. This interconnected decline in demand, investment, and consumer spending destabilizes the economic equilibrium. Thus, they lead to the onset of an economic crisis.

The same case occurred in China’s Economic Crisis!

5. Heavy Control on the Tech-industry

Do you know the prime reason for China’s massive development? Its tech-industry. The super-brains of China have played an important role in revolutionizing the innovation and technology of the country. Starting from microchips, smartphones, and all electronic gadgets, China manufacturers. Chinese smartphone brands like Redmi, Realme, Oppo, Vivo, OnePlus, etc. are ruling the affordable smartphone segment in the world. Apart from that, its vast lithium reserves made it a kingpin of Electric Vehicle batteries.

All these facts are indeed a massive sign of success, growth, and positive news for the country!

Unfortunately, the CCP (Chinese Communist Party), the ruling party of China, saw this fact as a threat. Yes, a humongous threat! If it would have been any liberal country like the US, Europe, or India then they would have been proud to boast and boost their tech sector.

What China did was already expected by analysts all around the world. The Government of China clamped down on its high-spirited tech sector. It took strict actions on the following-

• Video Gaming Companies
• Ed-tech sector
• E-Commerce

Can you guess the allegation put on them? As per the Chinese government, the tech companies were expanding heavily and becoming more powerful. And when it comes to power, nothing can beat the monopoly of the Communist Party in China.

As a result, the downsizing of tech-sector causes huge losses both in terms of revenues and jobs.

6. Effects of Climate Change

Climate change has also had an impact on China’s economy. We have seen the outcry of Chinese people during the recent floods. When you hear the yells of victims in a country with tightly controlled social media. You can estimate how devastated the situation has been there… The cities near Beijing nearly drowned. And guess what their government did. It instructed the officials to not let the waters enter the capital.

Well, the government was also helpless at that time. Reason? The floods came extraordinarily in the hot summer season. In reality, nobody was prepared for it. But still, the operating government should be prepared for every kind of disaster. Isn’t it?

Whether fewer NGOs or fewer markets, all the blame goes to the monopolized ruling party! That’s why people blame the Communist Party of China whenever things go wrong. This factor also challenges China’s political system.

Thus, natural disasters such as floods and extreme weather events caused huge damage to China’s infrastructure. It disrupted transportation networks and affected agricultural productivity. These factors have put additional strain on the already struggling economy.

7. Structural Changes in the Economy

China is in the footsteps to make a structural shift in its economy. It wants to reduce its reliance on exports and investment to a better-balanced model. It wants to emphasize domestic consumption and innovation. But China was doing fine in its previous strategy of exports and investments (debt traps). Then why did it change its strategy all of a sudden?

Well, the reasons are many. But the prime ones are the falling exports and vigilance of countries on China’s debt-trap diplomacy. People have seen the unfortunate fate of countries that fell under China’s debt traps. Some of them are-

• Pakistan
• Kenya
• Laos
• Zambia
• Mongolia

Also, its exports have also reduced by 14.5% this year. That’s why China is making significant structural shifts in its economy. However, this transition is not as easy as it sounds. It is quite challenging for the government as well as the public. That’s why it led to China’s Economic Crisis.

8. Demographic Shifts

China’s total fertility rate dropped to a record low of 1.09! The fertility rate of a stable population is 2.1, now you can imagine the scenario in China. The fertility rate refers to the average number of babies a woman can have in her lifetime. China’s aging population is itself a huge headache for the country. 

Its aging demographics represent the upcoming challenges that can hinder its economic growth. Not only China will see a massive decline in the labor supply but will have to spend more on the healthcare of senior citizens. A small workforce will erode domestic savings which will lead to higher interest rates and declined investments.

Do you know what added insult to this injury? The demographics are not in the control of any policymakers. No matter how many subsidiaries you provide for your countrymen. If they make up their minds to not raise children, they won’t! 

9. Geopolitical Dynamics

“China vs. the US” is the famous headline for the Global Trade Wars. From 2018, the trade tensions between the communist and the democratic country escalated consistently. And never looked back! It resulted in severe backlashes from both sides in terms of-

• Tariffs
• Sanctions
• Decoupling Measures

When it comes to allies, the US has loyal allies all around the world. These factors weakened the confidence of consumers and businesses in China. As a result, the value of Chinese currency also dropped drastically.

Why are the Global Markets worried about China’s Economic Crisis?

Global markets are concerned about China’s economic slowdown due to its substantial impact on the world economy. China is a major player in global trade, manufacturing, and commodity demand. A slowdown in its economy could lead to reduced demand for raw materials, affecting resource-rich countries. 

Additionally, China’s consumption patterns influence many multinational companies. A weaker Chinese market could decrease revenues. Moreover, China’s financial ties with international banks and investors could pose risks if its economic troubles escalate.

Overall, China’s economic slowdown has wide-ranging implications for global trade, investment, and economic stability, hence the market’s unease.

How can India benefit from China’s Economic Crisis?

Folks are highly curious to know that! India has the potential to benefit from the ongoing Chinese economic crisis in various ways. 

(A) India: A Better & Attractive Investment Destination

One key area where India can benefit is as an attractive investment destination. With China experiencing an economic slowdown, India becomes an appealing option for foreign investors seeking new opportunities. India’s stable economic environment, large consumer market, and skilled workforce make it an attractive choice for investors looking to diversify their portfolios. 

(B) Alternative & Better Manufacturing Hub

Another way India can benefit is by tapping into opportunities in sectors where China is facing challenges. For instance, India can seize the opportunity to expand its manufacturing capabilities as an alternative to China. If China reduces its exports, particularly of base metals and other commodities, due to slowing demand, it opens up room for Indian manufacturers to fill the gap and meet global demand. 

It’s worth noting that India’s advantage in benefiting from the Chinese economic crisis is not solely based on the crisis itself. But also on the factors that make India an attractive investment destination and a potential alternative manufacturing hub. 

By leveraging its strengths, India can capitalize on the opportunities arising from the Chinese economic downturn. Thus, it can potentially strengthen its own economy.

Final Thoughts

Now, it’s time to wrap up! China’s Economic Crisis serves as a reminder of the complexities inherent in rapid economic growth. The crisis underscores the importance of balanced expansion, prudent fiscal policies, and addressing structural imbalances.

You can learn that sustainable development requires a focus on quality over quantity, avoiding excessive reliance on debt, and fostering innovation-driven growth. Additionally, global interdependencies mean that economic turbulence in one nation can have far-reaching effects. 

This situation emphasizes the need for enhanced international cooperation, transparent financial systems, and proactive risk management. Thus, we can mitigate the impact of economic crises and maintain global stability!