- Initially hailed as the successor to American economic dominance, the anticipated Chinese century of growth appears to be faltering;
- Indicators such as negative FDI, declining exports, and deflation underscore China’s economic challenges;
- With a potential reshift in the balance of power, the notion of a seamless transition from American to Chinese hegemony is being questioned.
In the not-too-distant past, most major economic and geopolitical analysts were predicting that the size of China’s economy would surpass that of the United States, ultimately making the 21st century the Chinese century.
However, as of February 2024, this prediction doesn’t seem to be materializing.
While there was a near consensus that the American economy would fall into recession in 2023, it actually grew a healthy 3.1% in 2023.
On the other hand, China has been showing serious signs of economic stress and slowdown. Although hopes were high for China’s future after it successfully contained the spread of COVID-19 in 2020 with its strong lockdowns and controls, Beijing wasn’t so successful coming out of its lockdowns, putting a dent in these hopes.
A fair and clear signal of the contrast between China and the U.S. is the stock market. While the American S&P 500 index reached record highs, markets in China and Hong Kong lost $1.5 trillion in January 2024 alone.
However, it’s not just the stock market. Here are 9 other signs pointing to a dramatic Chinese economic slowdown:
1. Foreign Direct Investment (FDI) in China has gone negative for the first time on record.
In the third quarter of 2023, China experienced a decline in FDI, marking the first instance of negative inflow since records began in 1998. The State Administration of Foreign Exchange in China reported a foreign direct investment outflow of $11.8 billion during this period, suggesting a waning enthusiasm among overseas investors.
There are many reasons for this outflow. One is perhaps the regulatory tightening on technology firms that China initiated in 2020. This tightening has led to concerns about the potential for staff detentions on allegations of financial misconduct, which has, in turn, undermined investor confidence, prompting some businesses to scale back their operations. The sluggish COVID-19 recovery and a decline in consumer and business confidence have also contributed to negative FDI flows.
Some additional contributors to this negative FDI are the geopolitical risks of too much dependency on China and Mr. Xi’s support for Vladimir Putin. Because of this, many countries and companies are de-risking or decoupling from China – AKA reducing their investment and exposure inside China.
There are several different strategies companies use to accomplish this such as:
- China+1: when companies move part of their production to other countries while keeping a portion of their supply chain in China so as to not completely decouple from Beijing
- Re-shoring: when companies take their production back to their home soil (in other words, the opposite of offshoring), e.g. when American or European companies take their production out of China and back to the U.S. or the E.U.
- Near-shoring: when companies take their overseas production to a neighboring country, e.g. when American and Canadian companies bring their production and supply chain to Mexico, thus remaining close to their consumer markets in North America
- Friend-shoring: when companies move their value chains away from strategic rivals to “friendlier” countries, e.g. when American and European companies move their supply chain from China to India or Vietnam
Altogether, this outflow of foreign direct investment in China can be seen as a general reflection of the sharp deterioration in China’s economic prospects overall.
2. China’s annual exports dropped in 2023 for the first time in seven years.
It’s not just FDI that is dropping in China. In 2023, Chinese exports fell by 4.6%, which is the first significant annual drop since a 7.7% decline in 2016. This reduction suggests weakened global demand for Chinese products, likely due to the negative impact of ongoing trade tensions with the United States and the de-risking strategies (see above) being implemented by many Western nations today.
Ultimately, the challenges of exporting goods globally, a key driver of China’s historic rise from poverty over the last few decades, are intensifying.
3. The Chinese real estate market bubble appears to be bursting.
The Chinese property bubble that has helped propel the Chinese economy in recent years is quickly becoming a property crisis. When Beijing cut back on lending to property developers in 2020 and 2021 in attempts to deflate their property bubble, the real estate sector, which accounts for a significant portion of China’s GDP, began experiencing downturns with sales volumes dropping by 15% in 2023 and numerous developers facing liquidity issues.
Country Garden, the biggest builder in the Chinese property market, already defaulted on the interest of its dollar bonds in 2023. Evergrande, another Chinese developer juggernaut, went into liquidation in January 2024. The country’s property boom seems to be coming to an end. Cash-strapped developers are afraid to start building flats and people are afraid to buy them.
The volatility within this sector has far-reaching consequences for the broader economy. Should international investors face difficulties in repatriating funds during a liquidation or any broader crisis, it could significantly deter future investment in Chinese assets.
4. Chinese consumer confidence hasn’t recovered since collapsing in 2022.
Issues within the real estate sector, coupled with diminished foreign direct investment (FDI) and exports, have taken a toll on consumer confidence in China. Presently, the Chinese Consumer Confidence Index stands at 87.6 points.
Historically, from 1991 to 2023, the index averaged 109.96 points, reaching a peak of 127.00 in February 2021 – when China was coming out of the COVID-19 restrictions – and hitting a historic low of 85.50 in November 2022.
Since consumer confidence is directly correlated with retail consumption, this slowdown suggests that Chinese consumers are becoming more cautious about their spending amidst economic uncertainties.
This erosion of consumer confidence is contributing to a marked decrease in overall consumption, which in turn is causing a notable deflation in consumer prices within China.
5. China’s consumer prices have posted their steepest drop in 14 years.
China is currently experiencing its most extended period of deflation since the Asian financial crisis over 25 years ago.
In January 2024, the inflation rate fell by 0.8% when compared to the same month in 2023, marking the most significant decline since September 2009 and a more pronounced drop than the 0.3% seen in December 2023. This marks the fourth consecutive month of declines in China’s consumer price index (CPI).
This persistent deflation, indicated by falling prices for goods and services, often signals an economic slowdown and has thus prompted concerns about the future growth prospects of China’s economy.
One silver lining of China’s deflation is that Beijing might start exporting deflation to Western countries, many of whom have been struggling with higher-than-desired inflation. This signifies that Chinese products exported to the rest of the world might come with discounts, ultimately helping lower the overall inflation rate if these discounts are passed on to international consumers.
That said, low consumption will likely lead to higher unemployment in mainland China, leading us to our next point.
6. Chinese youth unemployment hit 21.3% in June 2023 (before the government stopped releasing data, that is).
Unemployment among urban youth aged 16 to 24 in China increased to 21.3% as of July 2023, according to official data. After these ugly numbers, the Chinese government stopped releasing data on youth unemployment.
This rising trend in joblessness among city-dwelling young Chinese has been ongoing for months, in part attributable to a disparity between the skills acquired by new graduates and the nature of available employment opportunities.
Such an uptick in unemployment rates reflects the difficulties facing the job market, indicating wider economic pressures within China.
7. Chinese loan growth expanded at its slowest pace on record in 2023.
The rate of increase in domestic loans in China grew by 10.4% year-over-year as of January 2024, based on the latest figures from the People’s Bank of China. This represents the most modest growth since records for this monthly data began in 2003, signaling a persistently tepid demand for credit.
Specifically, the ongoing downturn in the real estate market mentioned above, which previously made up nearly a third of total lending, continues to dampen the desire for loans. Homebuyers are hesitant to commit to mortgages amid the uncertainty surrounding income prospects and property values, while banks are increasingly cautious about extending credit to developers, many of whom have defaulted.
8. The Chinese stock market has lost $6.3 trillion since its peak.
These cumulative economic pressures have ultimately manifested in the feeble performance of the Chinese stock market. In the year 2024 alone, market valuations on the Chinese and Hong Kong exchanges have seen over $1 trillion erased.
The Shanghai Composite Index tumbled to its lowest level in five years on February 5th, 2024. In total, the index has declined by over 20% since the beginning of 2022. Since its peak, the cumulative market value of Chinese stocks has decreased by $6.3 trillion.
In an unexpected twist, many Chinese have piled onto the social media account of the U.S. Embassy in Beijing to vent about losses in the stock market.
9. China’s GDP growth has declined to 5.2% (or perhaps even lower, according to some economists).
The Gross Domestic Product (GDP) growth rate of China has seen a notable slowdown from its previous high-flying figures. According to the National Bureau of Statistics of China, the GDP growth rate fell to an estimated 5.2% in 2023. This was the slowest annual GDP growth China has seen in 30 years, excluding the COVID-19 years.
However, it’s known that Chinese official economic statistics are a black box, and many analysts are skeptical of the official figures of 5.2% GDP growth. Some point to a divergence between official economic data and other economic indicators – such as those mentioned above – suggesting that the real Chinese GDP growth for 2023 may be closer to just 1.5%.
What’s the geopolitical importance of an economic slowdown in China?
It’s clear that the Chinese economy, long regarded as an engine of global growth, has shown signs of significant deceleration. This slowdown is not merely a statistical adjustment but rather a trend that raises concerns about global economic stability, supply chains, and international trade dynamics.
On the other hand, with a fast-growing economy, a strong labor market with 3.7% unemployment, and a falling rate of inflation that currently sits at 3.1%, the United States has outpaced most of its counterparts in the OECD.
In terms of GDP, the United States posted a 3.3% gain in the fourth quarter of 2023, far exceeding economists’ 2% growth expectations. This puts the United States at 3.1% growth for 2023, and it’s on track to match this performance in 2024.
If the real number for China’s GDP growth is indeed around 1.5%, this would signify that, for the first time in many decades, the United States had a real GDP growth greater than China’s.
It’s worth noting, however, that this doesn’t mean this trend will continue into the next years or decades, especially with a potential new administration in the Oval Office starting in 2025.
Overall, this could all mean that the Chinese economy has transitioned from a growth economy to a more mature economy, suggesting lower economic growth in the long term. This would put the Chinese economy on a path of convergence with the American one, rather than a path where it surpasses it.
In other words, the pundits and investors screaming that the era of the American hegemony is over and a new Chinese one is brewing might have to re-access their fondness for Beijing and their distaste for the good ol’ US of A.
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