For decades, China has been an economic powerhouse. Domestically, a captive consumer audience of 1.4 billion people offered great potential. And for foreign markets, cheap labor as well as a massive foreign market meant great opportunity. It seemed China was poised to challenge the U.S.’s long-time global economic dominance. But as is often said, all good things must come to an end. And for China economically, it seems that end is happening as we speak. Not only is China’s economic outlook looking quite grim as of late, but the impact of China’s economic decline could have far-reaching effects, not only for China but for global affairs as well.
China is dealing with an abundance of issues when it comes to its economic well-being. The pandemic certainly didn’t help, and neither did its zero-COVID policy. But the country’s financial woes go much deeper than this, and there are telltale signs that bad times are ahead. Trade tensions with Europe and the U.S. have affected its export revenues. It is also dealing with a serious real estate crisis that will impact most citizens as well as municipalities. And China is just entering a period of potential social crises resulting from its aging population and declining workforce. Remedies could have and still could be pursued to address these issues, but there’s little sign that will happen. As a result, it will be important for other countries, including the U.S., to prepare for a declining Chinese economy.
“We’ve not been in a situation where so many developers are defaulting and consumers are questioning whether or not they should prepay for an apartment.” – Charlene Chu, Managing Director and Senior Analyst, Autonomous Research
A Bursting Rea Estate Bubble
Stories of China’s ghost cities have been well reported as of late as a portrait of China’s economic outlook. In many areas of the country, over-development of housing projects resulted in an abundance of dwellings with too few residents. According to some statistics, there currently exists some three million housing units for the 1.4 billion citizens in the country. Thus, it’s not surprising real estate values are falling fast based in simple supply and demand considerations. To make matters worse, Chinese shadow banks offering easy access to credit have been abundant. With properties now defaulting, they too are facing a crisis. Notably, this will play a tremendous role in China’s economic decline.
Based on actions to date, the Chinese government has no intention of providing a bailout. This will result in major problems if this continues to be the case. Chinese families use real estate to acquire personal wealth. But with declining values and upside-down mortgages, their wealth is dissipating. In addition, local municipalities rely of property sales to developers to fund social programs. With real estate development quickly declining, towns are also in trouble, being unable to fund needed services. By some accounts, properties in outlying areas have already lost 50% of their value. The impact of China’s economic decline on individuals and towns alike cannot be understated.
“I think the slow growth will cause such a serious employment and capital-flight problem, there could be political instability.” – Victor Shih, Associate Professor and Director of the 21st Century China Center, University of California San Diego
Employment Issues Loom Large
China’s economic outlook looks less than ideal for other reasons as well. Given the deflationary pressures stemming from the real estate market, spending is significantly down. Combined with fewer foreign exports, this means the demand for labor has been falling as of late in China. In fact, exports have dropped 14% this year compared to last year’s. This is further complicated by the fact that investment dollars are much less as well. Each of these factors play a major impact in China’s economic decline. Together, they have fueled a vicious cycle that could send the economy into freefall.
Consumer demand and investing are definitely major factors affecting employment opportunities. But even if jobs were readily available, China has another problem related to its working age population. For decades, China’s one-child mandate reduced population growth. Now, those of working age is decreasing compared to those retired. The ratio current between working age and older age citizens is 3-to-1. By 2050, this ratio is expected to be 1-to-1 despite lifting of the child mandate. This will have a major effect on China’s economic outlook for a long time to come. It will also create even greater social issues if adequate supports for older adults are lacking. This has many concerned, including the Chinese government, that social unrest could develop. In fact, this is this impact of China’s economic decline is a primary worry of Chinese leaders.
“This isn’t about the economy anymore, it’s all about advanced technology and weaponry.” – Lee Miller, Founder of the China Beige Book
Global Impact of China’s Economic Decline
With China’s economic outlook looking rather poor, there are repercussions likely to develop in the coming months to years. For one, reduced consumer spending in China will mean foreign markets for the U.S. and others in China will be much less robust. This will hit farmers and some multinational retailers in the process. But more importantly, supply chains and affordable labor may be harder to access. And China could impose currency controls that make it impossible to convert foreign earning into U.S. dollars. These issues along with already existing U.S.-Chinese trade tensions pose real threats to global markets.
China’s economic outlook doesn’t mean the country’s limiting its spending in other areas. While it may not offer a bailout to banks and developers, it is spending plenty on military and defense. Estimates suggest China’s annual budget is now $700 billion in this area with technologies investments being robust as well. This has led analysts to believe that there are fewer government concerns about the impact of China’s economic decline. Instead, they seem to be focusing more on national security issues and challenging the U.S.’s political power. Though Chinese citizens may suffer, China appears to have prioritized non-economic targets over economic ones. This too will have global effects on an even larger scale. Certainly, China’s declining economy is worth noting in an effort to devise new strategies. But it’s also worth recognizing that China’s economic woes don’t necessarily mean China will lose its global ranking with it comes to strength.