The sentiments of the world’s second-largest economy, China have grown increasingly negative in the past few months as it is facing a combination of cyclical and structural struggles.
Among the cyclical factors are scars from the COVID-19 pandemic, an ailing property sector, and a limited macroeconomic policy response. Structural pressures are weighing on confidence as regulatory, security, and political stability concerns continue to mount.
COVID-19 pandemic: The government's response to the pandemic has led to a "shutdown" of the economy due to large-scale isolation, resulting in declining consumption, production, and all economic activities, leading to lower economic growth in China.
The pandemic has also led to a slowdown of new foreign-invested enterprises and accelerated closure of existing ones, and unemployment problems have risen during the pandemic, especially for young workers.
Ailling property sector: The property market in China has been in decline for more than two years, and the government-led clampdown on developers' borrowing has led to a crisis in the sector. The property sector has played an outsized role in the Chinese economy, accounting for as much as 30% of the economy.
Investment in real estate fell last year for the first time in a decade, and with no bailout from Beijing in sight, the property downturn is likely to drag on, posing a major threat to China's growth prospects over the next three to five years.
Macroeconomic challenges: The declining exports, slowing consumption and investment, and rising unemployment are also contributing to the cyclical challenges faced by China's economy. The lack of aggregate easing reflects current policy objectives, with supply-side reforms dominating demand-side considerations in policy thinking.
Bailouts affecting the banking sector: Another key imbalance is local government and state-owned enterprise leverage. This is well known to authorities, who clamped down hard in 2021 in seeking to address off-balance sheet liabilities or “hidden debts.” This has without doubt contributed to weaker growth in recent years by reducing the spending of local governments.
Geopolitical headwinds: “De-risking” and the reworking of supply chains have reduced foreign direct investment into China and direct Chinese exports to the US. The US’s China+1 policy is likely to have a major impact on the supply chain towards China.
The structural challenges include regulatory, security, and political stability concerns, an overly reliant and unproductive investment, and a slowdown in new foreign-invested enterprises. These challenges have led to a multidimensional moment of macroeconomic weakness, indicating serious structural issues within China's economy that go beyond the cyclical problems caused by COVID-19 and other factors.
While these challenges pose risks, they also present potential opportunities, such as incentivizing structural reforms, creating attractive investment opportunities in areas like technology and healthcare, and fostering global influence and cooperation. Addressing these challenges will require comprehensive macroeconomic policies, structural reforms, and innovation.
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