Indian Council of World Affairs

China was hoping for a strong economic recovery in the year 2023 after almost three years of Covid isolation. However, recent data released by China’s National Bureau of Statistics (NBS) for the second quarter of 2023(April to June) indicates that the recovery is losing momentum. Compared with first quarter of 2023, China’s economy in the second quarter grew by merely 0.8 percent.[i] Economic activity data for July 2023, including industrial output, investment and retail sales, failed to match estimates fuelling concerns over a deeper and longer-lasting slowdown in growth.[ii] China may struggle to achieve a 5 percent growth target for the year 2023. The paper aims to analyse the main factors responsible for slowdown of the Chinese economy. 

Demographic factors 

China’s degree of aging is consistently increasing. Consequently, country’s working age population is shrinking every year. In the last 10 years, the average annual decrease has been about three million people. Labour cost in China has increased by around 12 percent annually in last one decade.[iii] This trend has caused some of the traditional labour intensive industries to migrate to neighbouring countries and regions, which have lower labour costs. Labour productivity growth has also decreased over the last 10 years.[iv]  Therefore, experts emphasize that the supply of labour as a factor of production is “weakening or even deteriorating”.[v]

High youth unemployment 

China’s overall urban employment rate dropped from 5.5 percent in January 2023 to 5.2 percent in June 2023. Over the same period, the youth unemployment rate rose rapidly from 17.3 percent to a record level of 21.3 percent.[vi] Experts estimate that the unemployment rate in the 16-24 years age group may even go higher than the record level of June. The NBS on August 15, 2023 informed that it would no longer release age group-specific unemployment data starting August 2023.[vii] This move has been seen by many as an attempt to conceal data which might be alarming. A weakening private sector in China is also a cause for youth unemployment as private sector provides majority of urban jobs to youth in China. 

Shrinking Private Sector investment 

Private companies’ investments in China shrunk after Covid restrictions were relaxed. Some non-official data sources suggest that business conditions for private firms have deteriorated in recent months. According to a survey conducted by the Cheung Kong Graduate School of Business (CKGSB) in China, business environment for private companies has been sliding significantly on all counts including sales, profits, financing environment since May 2023.[viii] Further, the market capitalisation share of private sector companies declined from its peak at 55 percent by the end June 2021 to 39 percent by the end June 2023. It is also noteworthy that China’s state sectors share has expanded to more than 60 percent. [ix]

Local government debt 

According to International Monetary Fund (IMF) report on China’s economy[x], the debt of China’s local-government financing vehicles (LGFVs)[xi] has almost doubled since 2017, reaching an estimated 56.671 trillion renminbi (RMB), or approximately US $7.8 trillion in 2022. The rapid increase in debt has raised concerns about the financial stability of China’s local governments, which is expected to add further pressure to the Chinese national economy. Recently, some experts highlighted that China’s “hidden debt” of local government could threaten the national economy.[xii]

Implications of China-US contestations 

China and the US have entered a period of intense economic, political, technological and military competition although their economies are deeply integrated. There are people in China who warn against damaging relationship with the US. This is because the core technologies of many industries in China are still controlled by the US.[xiii] Therefore, China-US contestations may significantly affect industrial upgrading and high quality development in the country. 

Well-known strategist and expert from China, Prof. Yan Xuetong argues that the core of the strategic competition between China and the US is digital technology and hence the competition is focused in digital technology innovation. He argues that digital economy will become the primary source of national wealth for major economies and notes that “…the digital economy grows at 1.5 times the rate of the overall economy…. This means thatthe digital economy will account for an increasing share of national wealth for all major countries.”[xiv] In the recent past, the US has followed a strategy called “small yard, high fence”[xv] to restrict China digital technology innovation. Experts see this as a factor in the Chinese economic slowdown. 

Carbon neutrality goals 

Carbon neutrality goals set by China present opportunities as well as challenges. China has set the timeline of 2060 for achieving the carbon neutrality goals. This is important as economic practices in past have caused serious damages to the environment in China. Government has implemented environment protection restrictions in recent past. Some reports suggest that “new restrictions put enormous pressure on some of China's traditional industries with relatively high emissions or energy consumption. Consequently, some small and medium-sized enterprises have been shut down by the government.”[xvi] This transformation pressure implies that industries like steel, cement, building materials, and chemical enterprises need to undergo new technological transformations to meet emission reduction requirements. For many Chinese enterprises, the main question at present is whether they can bear the cost increase that would accompany their climate- friendly transformation. 

The Political Bureau Meeting of CPC in July 2023 

The Political Bureau of Communist Party of China (CPC) held a meeting on July 25, 2023 to analyse the economic situation and to propose measures for recovery. The meeting was chaired by General Secretary of the CPC and President of China, Xi Jinping. The meeting acknowledged that the Chinese economy is facing “new difficulties and challenges”, which are results of “risks and hidden dangers in key areas”, as well as a “grim and complex external environment”.[xvii] The leadership announced several measures to tackle the situation which include (a) Boosting domestic consumption, (b) Need to stabilise employment from a strategic perspective, (c) Further advancing modernisation of industrial system, (d) Defusing local debt risks and (e) Promoting high quality development.[xviii]

Conclusion 

It is evident that China’s economy is experiencing a structural slowdown. Recent economic data especially the growth of Chinese economy in second quarter of 2023 and economic activity data for July 2023 suggest a pessimistic view about the fast recovery of the Chinese economy after the withdrawal of Zero-Covid policy in December 2022. The Chinese government has announced measures to tackle the situation and achieve the target of China’s growth and development in the remaining months of 2023. However, the challenge to achieve an accelerated, sustainable and environment friendly growth for China is very obvious.

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*Dr. Sanjeev Kumar, Senior Research Fellow, Indian Council of World Affairs, New Delhi.
Disclaimer: Views expressed are personal.

Notes:

[i]“China's Q2 GDP growth slows to 0.8% q/q, raises stimulus expectations”, 17.7 2023, available at https://www.reuters.com/markets/asia/view-chinas-q2-gdp-growth-slows-08-qq-just-above-expectations-2023-07-17/, Accessed on 30.7.2023.

[ii]“How much worse can China's economic slowdown get?” 16.8.2023 available at https://www.reuters.com/markets/asia/how-much-worse-can-chinas-economic-slowdown-get-2023-08-15/#:~:text=Economists%20blame%20weak%20domestic%20demand,slowdown%20and%20deepen%20debt%20problems, Accessed on 16.8.2023

[iii]“Ex-NDRC official's comprehensive review of China's economy & reform”, 17.06.2023 available at https://www.pekingnology.com/p/ex-ndrc-officials-comprehensive-review, Accessed on 30.7.2023

[iv] Ibid

[v]Ibid

[vi]“Half a year into China’s reopening after COVID, private economic activity remains weak”, 31.7. 2023, available at https://www.piie.com/blogs/realtime-economics/half-year-chinas-reopening-after-covid-private-economic-activity-remains#:~:text=In%20fact%2C%20latest%20data%20from,the%20first%20half%20of%202023, Accessed on 12.8.2023.

[vii]“China stops releasing youth unemployment data amid disappointing economic figures”,  15.8.2023, available at https://www.wionews.com/world/china-stops-releasing-youth-unemployment-data-amid-disappointing-economic-figures-625733, Accessed on 16.8.2023.

[viii]“Half a year into China’s reopening after COVID, private economic activity remains weak”, 31.7.2023 available at https://www.piie.com/blogs/realtime-economics/half-year-chinas-reopening-after-covid-private-economic-activity-remains#:~:text=In%20fact%2C%20latest%20data%20from,the%20first%20half%20of%202023, Accessed on 12.8.2023.

[ix]Ibid

[x]“Why China’s local government debt nearly doubled in 5 yrs, and why problem may get worse”, 13.7.2023, available at https://theprint.in/world/why-chinas-local-government-debt-nearly-doubled-in-5-yrs-and-why-problem-may-get-worse/1666439/, Accessed on 30.7.2023.

[xi]LGFVs are companies created by local governments to borrow from banks, trust companies, or the bond market.

[xii] Cheng Siwei, Liu Ran, Ding Feng and Denise Jia “Cover Story: China’s ‘Hidden Debt’ of Local Governments Threatens National Economy” 21.8.2023, available at https://www.caixinglobal.com/2023-08-21/cover-story-chinas-hidden-debt-of-local-governments-threatens-national-economy-102094895.html, accessed on 21.8.2023

[xiii]“Ex-NDRC official's comprehensive review of China's economy & reform”, 17.6.2023 available at https://www.pekingnology.com/p/ex-ndrc-officials-comprehensive-review, Accessed on 30.7.2023.

[xiv]“Yan Xuetong: Trajectory of China-U.S. Relations in New International Order”, 30.6.2023 available at https://www.pekingnology.com/p/yan-xuetong-trajectory-of-china-us, Accessed on 30.7.2023.

[xv]The strategy constitutes targeted and specific restrictions on technology which has national security and military applications for the US.

[xvi]“Ex-NDRC official's comprehensive review of China's economy & reform”, 17.6.2023 available at https://www.pekingnology.com/p/ex-ndrc-officials-comprehensive-review, Accessed on 30.7.2023.

[xvii]“CPC leadership holds meeting to analyze economic situation, make arrangements for work in the second half of the year”, 25.7.2023, available at https://english.news.cn/20230725/80b63f5a077c448d80d870c84908c53d/c.html, Accessed on 30.7.2023.

[xviii]Ibid