Peak China

Peak China

by Mel Gurtov

930 words

Signs of Peaking

China’s economy has probably peaked in size and performance. The era of investment and credit expansion seems to be over. As Bloomberg recently reported, factory output has slowed, unemployment has risen, and the stock market has reeled. 

China’s share of the world economy has dropped. It peaked at 18.3 percent of global GDP in 2021, dropping to 16.9 percent in 2023. (The US economy has averaged 26.2 percent of the world economy during all those years.)

Several key indicators that show that China’s economic weakening is structural rather than cyclical. They include a declining work-force population, youth unemployment, credit and investment drop-offs, failures in real estate and infrastructure, and the flight of multinational corporations to more accommodating locations.

All these problems suggest the need for significant reforms, but there is no sign that the leadership accepts the idea of peaking and is prepared to put major funds into propping up the weak sectors, starting with consumer spending. Economists outside China say it would take at least $1 trillion (4-6 trillion RMB) to make a difference. But China’s priority seems to be major investments in those high-tech areas that compete with the West, namely, EVs, renewable energy, and semiconductors.

Real Estate and Youth Unemployment: A Closer Look

The real estate market is “the elephant in the room” according to a senior Chinese economist. Real estate once comprised 30 percent of China’s GDP and 80 percent of household wealth. (Unlike Americans, few Chinese are stockholders.) The economist says demand from China’s consumers is there, but they don’t want to buy property because of the risk the homes cannot be delivered. Apartments in China have typically been sold ahead of completion. Some 20 million pre-sold apartment units remain unfinished, according to one outside economic source. “Homebuyers of one such project told CNBC earlier this year they had been waiting for eight years to get their homes.”

If the Chinese leadership were serious about helping consumers, it might bail out these unhappy property owners and take steps to stabilize the real estate market. China’s central bank did respond, in September 2024, by making loans easier to obtain and cutting interest rates on existing mortgages. Commercial banks were told they could lend a good deal more money to companies and households. Whether those steps will be enough to kick-start the economy remains to be seen, since the Chinese are savers, not spenders.

(Here’s a local example of the problem: Xinhua, China’s official news agency, reports that “Shanghai will allocate 500 million yuan from its municipal budget to issue consumption vouchers for the dining, accommodation, cinema and sports sectors.” When you divide that amount among the city’s 25-million-plus population, each Shanghaiese will get a few dollars to spend. Hardly the sort of allocation likely to propel consumption.)

Youth unemployment is a second serious economic problem to which China’s leadership has not adequately responded. Unemployed young people can become a source of political protest, but meeting their needs has proven difficult for the Chinese government. It comes at a time when the population is fast ageing and the work force actually needs more bodies, in part so that enough people pay in to the pension system to keep it viable. The government’s decision in late 2024 to raise the retirement age will help keep the pension system afloat, but it will also mean that young working people will have to work longer to get to pension age. For them, the pension reform is bad news, a disincentive to work and save unless the government also provides higher-quality jobs, job security, and more opportunities for women.

Not a Pretty Picture

 Many observers therefore predict that the Chinese economy will continue to struggle, notwithstanding a jump in the stock market and in property sales. Bloomberg reports on the World Bank’s assessment of what China’s economic slowdown means for the rest of Asia: 

“China’s expansion is set to drop to 4.3% next year from an estimated 4.8% in 2024, the [Bank] said in its semi-annual economic outlook report. As a result, growth in East Asia and the Pacific—which includes countries like Indonesia, Australia and Korea—will slow to 4.4% in 2025 from about 4.8% this year.” 

The Bank is not convinced that the Chinese government’s various monetary stimuli will significantly jumpstart the economy. China needs structural reform, says the Bank. A Wall Street Journal writer reports: 

“Without more forceful stimulus directed toward boosting spending instead of expanding supply, the risk, economists say, is that China slips into a damaging period of falling prices and subdued growth similar to Japan’s decades-long stagnation, or the painful debt workouts that followed past real-estate crises in Europe and the U.S. . . . The only bright spot is exports, which rose 8.7% year-over-year in August, easily outpacing imports, which eked out growth of just 0.5%.” 

But even that bright spot has problems, because China is viewed, especially in the US, Europe, and India, as exporting overcapacity in manufacturing that is resulting in undercutting prices in those countries. Thus, we find strong resistance by German automakers to electric vehicle imports from China, and major tariff increases on Chinese goods in the US and India to make local prices more competitive.

A final note: There is one class of Chinese who are doing just fine during the economic downturn—the superrich. (Sound familiar?) A research organization that tracks these so-called centimillionaires—defined as people with investable wealth of $100 million or more– finds that their number has surged by 54 percent worldwide over the last decade, with Chinese making the biggest gains.

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Mel Gurtov, syndicated by PeaceVoice, is Professor Emeritus of Political Science at Portland State University.