Wake Up Dragon
An Insight into China’s Recently Underwhelming Economic Performance.
B. N. Dent
IN THE EARLY 20TH CENTURY, CHINA’S ECONOMY was by no means considered a force to be reckoned with as it suffered in the form of stagnation, poverty, and inefficiency due to the nature of its structure. The structure it had in place can be described as a centrally planned system where, within the economy, the government controls the factors of production. However, ever since Deng Xiaoping’s economic reforms in 1978, which aimed to create a more open market, China has seen immense economic growth, positioning itself as an impenetrable economy heading into the 21st Century. Such stature and prosperity have led to the nation being the centre point of the United States’ contemporary fears of being dethroned as the leading world economy– a title that they have held since overtaking the British Empire in 1890.
Between 1990-2023, the United States has averaged an annual GDP growth rate of roughly 3% per year whilst China has boasted a rate of 10%. Therefore, despite the head start that the United States may have had due to their consistently solid economic state in the 20th Century, the annual growth statistics show that the rate at which China’s economy is growing is far quicker than that of the US. According to World Bank statistics, at the beginning of 2023, the USA’s Real GDP sat at around $20 trillion USD, with China’s trailing by just $4 trillion USD. This gap has been shrinking since China’s economic reforms.
However, recently released July data points surrounding China’s economy have shed doubt on just how fast (or whether at all) China will be able to close this gap and assert its dominance over its annoyingly patriotic older sibling, the US. Such data points include a 0.3% fall in consumer price index (CPI) and 4.4% fall in producer price index (PPI) compared to 2022. These figures essentially indicate a decrease in the price of goods and services within the economy, thus showing that China is currently facing the big bad DEFLATION.
In being the counterpart to inflation, upon initial exposure, some may think that deflation is a good thing: lower prices, more affordable society, ability to purchase jetpack, right? Well at least that was my train of thought. However, the effects of deflation lead to far worse economic outcomes than that of inflation. Deflation is an indication that the market is not growing, as prices fall, not out of the kindness of producers’ hearts, but due to a lack of demand. This can ultimately incite a variety of market failures, such as high unemployment, an influx in real debt burden, etc. So, when it was announced last week that the second biggest economy in the world was experiencing deflation, economists around the globe were quite shocked. Shocked on account that :
- China’s post-Covid economy was predicted to roar and;
- Most Western economies, such as Australia and the U.S., have been fighting the opposite battle – high inflation.
So how is it that China has found itself in this predicament? Well, most analysts equate China’s current deflationary economy to the desolate state of their property market. Whilst the property market showed signs of recovery early this year from its stagnant state during Covid-19, as of late it has been decreasing at an alarming rate. It is estimated that property sales have fallen back to 70% of the level they were at in 2019 prior to the first Covid-19 lockdown. A reason for this drastic fall in sales can be correlated to an overestimation in property market demand by the Chinese government and major property development firms such as Country Garden. Before the onset of tight Covid restrictions in China, property was in extremely high demand, but developers were forced to stop all projects. In light of this, the Chinese government made it easier for indebted property developers to raise money so that they could complete delayed construction projects after the lockdowns. Sure enough, this incentive meant that many development projects were completed just after the easing of quarantine restrictions. However, to the surprise of development firms, they were not met with high consumer demand, which was expected to occur in the form of “revenge spending” due to the major increase in consumer savings during the lockdown. This has ultimately greatly hurt the real-estate sector and pushed many firms to the brink of default (i.e., being unable to pay off interest payments) which has in turn damaged the Chinese economy, and alongside weak trade and restrained domestic demand, deflated the wings of the dragon.
In response to this, China’s government will require some fancy footwork to navigate the extremely fine line they are walking across. One wrong step in their complex economic conundrum could demolish all of the strives they have been making in the 21st Century towards becoming the leading world economic power.