It’s a brutal year for most countries’ economies, as inflation rises to highs unseen in decades and lingering pandemic disruptions create financial uncertainty for billions of people. In China, long accustomed to strong economic indicators, GDP growth has been largely stagnant this year, as Covid restrictions lock down factories and major cities. But the coronavirus doesn’t explain other signs of economic distress in the country. Many global tech companies have flourished during the pandemic, yet the Chinese tech sector has lost more than US$1 trillion in market value since 2020, with the government in Beijing cracking down on some of the country’s biggest tech corporations. Public protests broke out in many Chinese cities this summer, as homebuyers in 24 out of 31 provinces boycotted their mortgage payments on unfinished apartments. Several regional banks have now collapsed, and the unemployment rate has hit nearly 20 percent for people between 16 and 24 years old. Apple, Microsoft, and Amazon have moved some electronics production out of the country altogether. What’s going on here?
Jeremy Mark is a senior fellow in the Geoeconomics Center of the Atlantic Council, a policy institute in Washington, and formerly a reporter and editor for The Wall Street Journal based in Singapore, Taiwan, and Japan. As Mark sees it, Covid is harming China’s economic performance, but below this phenomenon, the country is suffering from more fundamental issues that make its post-Covid prospects highly uncertain. Some of the problems come from how rapid China’s growth was in previous decades, leaving it today in need of developing a new, more advanced economy, less dependent on low-wage manufacturing. But a major economic—and increasingly, political—threat is now inequality, with nearly half of Chinese people still living on less than $150 a month. Under President Xi Jinping, the state has meanwhile become more protective of its power, weakening rival power centers, including the leading tech firms. And Beijing now faces the critical question of how to deal with enormous debt in the property sector, which is damaging developers, banks, and households. The critical choices facing Xi and the Chinese Communist Party, Mark says, will determine whether China pursues a more state-directed or private-sector model for the world’s second-largest economy.
Michael Bluhm: How would you describe the current condition of the Chinese economy?
Jeremy Mark: China’s Zero Covid response to the coronavirus—the shutdowns of cities and restrictions on travel, all aimed at containing the virus—has seriously damaged the country’s economy, but it’s only one of several factors. It’s the straw breaking the camel’s back. The result is GDP growth that’ll probably be below 3 percent this year, which for China is the equivalent of a recession. In 2021, growth was 8 percent.
Beyond Covid, the Chinese economy faces serious structural problems. Public policies in recent years have led to self-inflicted wounds, and Zero Covid is only the most recent example. The biggest structural issue is China’s need to upgrade its manufacturing sector and move beyond low-end manufacturing based on cheap labor. It also needs a modern financial system, because the current system is hampering growth. And it’s facing the reality of a rapidly aging, shrinking population. All these transitions are becoming harder and harder for the government in Beijing.
The single most pressing structural issue right now, though, is that China’s rapid growth over the past decade has been accompanied by the massive accumulation of corporate and household debt in the property sector. The instability of this sector is threatening a large part of corporate China. It’s also threatening households, whose wealth has largely been based on real estate. It’s threatening local governments that have come to depend on property development for revenue. And now it’s even threatening many Chinese financial institutions. How the core issue of this property bubble is resolved will substantially affect China’s future economic course.
Bluhm: You mention policy decisions beyond Zero Covid having contributed to China’s economic problems. What do you have in mind?