China’s economy has shown further signs of weakness in the second quarter. The nation’s GDP expanded by 0.8 per cent during April-June, compared with the previous quarter; and worryingly, youth unemployment has hit a record high. The latest data shows that the economy has missed growth expectations and consumers continue to remain cautious. As a result, Chinese policymakers are under increasing pressure to unveil a stimulus package for the world’s second-largest economy.
Here is a look at the main storm clouds over China’s economy.
For almost 3 years, strict zero-Covid policies meant repeated lockdowns, the fear of being arbitrarily quarantined and other draconian health measures. When the restrictions were lifted at the end of 2022, millions flocked to restaurants, shopping malls and on long-awaited holidays. However, that optimism hasn’t lasted, with the recovery running out of steam and the labour market under pressure.
Moreover, more than one in five young people is unemployed. As per China’s National Bureau of Statistics, unemployment among Chinese youths jumped to a record 21.3 per cent in June. Overall, urban unemployment remained at 5.2 per cent.
Real estate crisis
Brick and mortar are a pillar of the Chinese economy. Property has long been seen as a safe bet for middle-class Chinese seeking to grow their wealth. The demand sent property prices soaring, while developers expanded at breakneck speed thanks to generous bank loans. But as the real estate companies’ debts reached unsustainable heights, authorities pushed the brakes in 2020.
Since then, developers’ access to credit has been considerably reduced. The most vulnerable entities are struggling to complete their projects, fuelling a crisis of confidence with potential buyers that is depressing prices.
China’s central bank last week decided to extend its support for developers, notably through loan repayment extensions, until the end of 2024. The decision came after officials cut interest rates last month. Analysts say the measures are insufficient to save the sector.
Fear of looming deflation
For months, prices in China have been virtually flat. While on paper, this may seem like a good thing for purchasing power, a drop into deflation would pose a long-term threat. Instead of spending, consumers postpone purchases in the hope of lower prices.
And in the absence of demand, companies cut back on production, freeze hiring or lay off staff and agree to further price cuts to clear their inventories. It consequentially weighs on profitability as the companies’ costs remain the same.
Chinese trade under threat
China, long described as the workshop of the world, remains highly dependent on exports, making it vulnerable to changes in the global economy. The threat of recession in the US and Europe, combined with galloping inflation, is weakening international demand for Chinese products. In June, exports fell for the second month in a row.
President Xi Jinping is seemingly struggling to navigate through geopolitical tensions. Tensions between China and the United States have also hurt the economic outlook.
Washington officials are working to de-risk their economy from China.
The US is working to tighten restrictions on semiconductor exports, and is pressuring allies to do the same. Last week, the Chinese customs spokesperson blamed outside forces having a direct impact on Chinese trade.
Debt burden on local authorities
Also dragging on the economy is the dire finances of some local authorities after three years of astronomical spending to combat Covid-19. The real estate crisis has deprived them of a major source of property income.