What’s wrong with China’s economy?

What’s wrong with China’s economy? Jeremy Mark on the property crisis, income inequality, and the need for a new economic model.

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.

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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?

Mark: The governance of China has become the domain of a single man, President Xi Jinping, whose interests are now focused on the accumulation of power for himself and the Chinese Communist Party—and on a very specific vision of China’s future. The Chinese Communist Party, the CCP, will hold its 20th Party Congress next month, which will re-elect him as the party leader, after which we can expect to see the continuation of Xi’s one-man rule for the foreseeable future.

This has serious implications for the economy, because Xi has made a series of policy decisions that have hurt the economy—what I referred to as self-inflicted wounds—and growth is weak. Consumer confidence has been undermined, and Xi has made things worse by cracking down on China’s tech sector and humiliating a lot of China’s most successful entrepreneurs. And he’s overseen policy actions that have punctured the property bubble without any clear vision of how the government will prevent a financial crisis.

All this has undermined many Chinese people’s dreams for their future. And it’s taking place at a time when the global economy is struggling to cope with the effects of Covid, soaring energy and food prices, and the Ukraine war. As a result, we’re likely to see a drop-off in demand for Chinese exports in the coming year—and then that will only make matters worse.

“Party leaders were greatly concerned by the social trends emerging from what made these tech companies so successful. So you’ve seen a crackdown in online education, which was seen as profiteering at the expense of parents trying to raise successful children. It was also seen as widening inequalities in Chinese society, because only the very well-off could afford to get the best education through these profit-making companies. There was a crackdown on online video games and movie streaming, because the authorities felt that too many young people were spending too much time in unproductive pursuits, as opposed to a more serious, nationalistic approach to education and daily life. There were grave concerns about monopolistic behavior by big tech companies, as well, which dominate retail, online payments, and other sectors—and a feeling that these companies were violating laws, necessitating extensive new laws to control the companies. Ultimately, the Party saw a competing power center emerging among many of the most successful capitalists—and they cracked the whip.”

“The biggest issue is that there are deep inequalities in Chinese society. For all the sense there is of China as a very prosperous, modern country, the fact is that 600 million Chinese live on an income of less than $150 a month. The gap between rich and poor—and even between the middle class and the poor—has been growing and is now very wide. And you see this reflected in educational inequality. Only one-quarter of the labor force has a high-school degree. By one estimate in 2018, only 13 percent of young men in the countryside had one. Xi Jinping and the Chinese Communist Party are very focused on this because, if you’re talking about sources of potential unrest in the future, 600 million people who don’t have a middle-class income are a much bigger cause for worry than high-school and college graduates who’re having trouble finding jobs.”

“How Beijing decides to get past this property crisis will determine the next 10 to 20 years for China. They can muddle through, and the central government has vast financial resources—but a crisis like this is going to require vast financial resources. And the question is how they’re going to move to address some of the deep problems that have emerged across local government, the private sector, and state-owned companies. China could very well end up going through a period of very slow growth that will make it much more difficult to meet the needs of its people, particularly the hundreds of millions who haven’t benefited as the middle class and the wealthy have benefited. There are key questions about the relative roles of the private sector and the state sector—and Beijing’s impulses in recent years have been toward a statist response, such as reining in the tech companies, which hasn’t helped the economy.”