VSver the past thirty years, China’s growth seemed irresistible. Despite the vagaries of the economy, the country’s economic catch-up with the developed world has followed its own pace, defying cycles and external shocks. The year 2023 should mark a turning point. After the insane policy of zero Covid, that is to say strict closure of the country to fight against the pandemic, the hoped-for rebound did not take place. Worse, while Western countries have largely erased the stigma of the health shock, China is encountering persistent difficulties which are as many threats to the stability of the world economy.
The pace of GDP growth in the second quarter was divided by three compared to the first, posting a sluggish increase of 0.8%, which casts doubts on China’s ability to reach the 5% target set for the whole year.
As the world’s second-largest economy entered deflation in July and youth unemployment spikes, the main engines of the economy are experiencing serious misfires. First, “made in China” is no longer as attractive abroad. Developed countries, faced with rising interest rates, reduced their imports. In addition, emerging from Covid-19, Western consumers directed their spending more towards services than towards manufactured goods, of which China provides a third of global demand.
housing crisis
Next, Chinese consumption is unable to take over from the drop in exports. Households are reluctant to spend. The wealth effect, fueled by the continuous rise in property prices in recent years, has faded away. Housing, which had experienced frantic growth, has been plunged into a deep crisis since Xi Jinping’s decision to regulate an overheated sector more strictly. The measures, undoubtedly necessary to clean up an activity which represents more than a quarter of Chinese GDP, have caused a cascade of bankruptcies among developers, a weakening of creditors and an unprecedented drop in the price of apartments, which undermines the confidence of owners. .
Finally, the political tightening decided by the Chinese president to bring the technological and educational sector back into line, added to the geopolitical tensions with the United States and the desire of Europeans to reduce their dependence on a China, now perceived as a threat, ended up breaking the dynamic.
Failing to have been able to carry out in time the economic transformation of a country which has successfully taken off by becoming the “factory of the world” towards a model based more on domestic consumption, the Chinese authorities find themselves faced with a dilemma . Pursue consolidation at the cost of social and financial tensions with uncertain consequences, or else bail out sectors in difficulty and local governments, strangled by debt, at the risk of undermining the political credibility of the regime on its ability to carry out the necessary reforms .
The timid and insufficient reduction in the rates of certain bank loans decided on Monday, August 21 and the procrastination on the use of the budgetary weapon to revive the economy show the embarrassment of Chinese power. But the longer the decisions are delayed, the greater the means to be deployed will have to be to curb a deflationary mechanism that risks weighing down on Chinese and global growth in the long term.