China’s economic woes keep getting worse. Here’s why

China’s economy, the world’s second-largest economy, is facing deflationary pressure, which has led to a decrease in aggregate demand. Meanwhile, in July, investment, industrial output, and retail sales grew at a slower pace than expected. Analysts had anticipated a rapid recovery for China this year, following three years of strict “zero-COVID” lockdowns.

Beijing’s strategies played a role in the challenges faced by its real estate industry, such as how much the Chinese economy has worried the United States. Given the current political atmosphere in Beijing, it remains to be seen if pragmatism can persist, although Chinese policymakers were previously recognized for their pragmatic approach.

She is currently the chief economist and managing director of UBS in Hong Kong, and she is a former economist at the International Monetary Fund. She spoke to NPR about her book “Making Sense of China’s Economy,” which she authored along with Wang Tao.

Should we be worried about China’s economic trajectory? What went wrong? The Chinese economy was expected to roar back this year, in 2023.

As the second quarter came to an end, the overall economic growth slumped, resulting from a slowdown in consumption and destocking in the industrial sector. This was further constrained by tightened fiscal spending as local governments faced challenges in financing. In addition, the recovery was hindered by falling housing starts and sales, causing the property market to falter in the second quarter. However, it is expected that the recovery will be slightly better than anticipated, driven by a rebound in consumption led by the normalization of economic activities. Furthermore, improvements in the labor market and stabilization of the property sector are also expected to contribute to the anticipated recovery. The consensus expectation is that China’s economy will recover this year, three years after the implementation of the zero-COVID policy.

The prolonged downturn in the property sector will continue to depress prices, as well as the confidence and income of both households and corporations. The current policy measures have not proven to be sufficient in halting the fall or significantly easing the situation. If the property sector does not stabilize, the economy may not recover in the second half of this year, and growth may only reach around 3% in 2022, compared to the approximately 5% growth projected for this year. Our baseline forecast predicts a quarter-on-quarter growth recovery of 4.5-4% in the fourth and third quarters, leading to an annual GDP growth of about 5%. We anticipate that more supportive policies, including increased credit support for infrastructure investment and modest easing of property investment policies, will be implemented. In a late July meeting, the senior leadership of China’s Politburo acknowledged the difficulties facing the economy and vowed to roll out more supportive policies to stabilize it.

Did the government’s enforcement of more stringent regulations and decrease in debt within the real estate sector in recent years contribute to the slowdown?

Falling profits and weak business confidence are likely factors behind the subdued post-investment private sector, although blame can also be attributed to COVID. To restore confidence in the business sector, concrete and reassuring measures may be necessary, and the government has now signaled its commitment to supporting internet companies and the private sector through regulations and normalization. A few years ago, the tutoring sector and internet fintech platforms experienced a sharp correction during a concentrated period of time, with little warning. This was exacerbated by the pandemic, which caused major shifts in supply and demand in the long-term real estate market. However, it was certainly the government’s tightening property measures that triggered the ongoing property downturn.

State media hinted in the past weeks that there’d be more support to the property market. Would this be a game changer?

The meeting of the Politburo in July signaled hope for additional easing measures from local ministries and governments, which can help stabilize property sales and prevent defaulting from developers. However, so far the marginal easing has not been able to stop the downward trend in property activities. Recognizing the biggest risk in property is the leverage and prices, the government has already signaled a change in property policy by late 2022, after recognizing that the current downturn in property is endangering the financial system and dragging down the economy. I think the current downturn in property was brought about by earlier tightening policies and changes in fundamentals.

Despite their recovery from the present troughs, the demand for real estate and construction will continue to be notably lower than the peak levels of 2020-2021. This implies that the fundamental aspects of real estate have undergone changes – China’s population has probably reached its highest point, urbanization is decelerating, and home ownership is already at a very high level. Nevertheless, it is uncertain whether extensive measures to ease real estate will be enough to promptly stabilize the property market, considering the absence of such measures.

The problem of debt has been extensively discussed for numerous years. How severe is the issue currently?

Many local governments do not have enough cash flow to pay the interest on their debt, given the deep property slump. The level of local government debt is estimated to be more than 70% of GDP. On the other hand, China’s central government debt is relatively small, just above 20% of GDP. Among the highest in advanced economies and emerging markets, China’s overall debt-to-GDP ratio is rising and is about 300%.

Despite the relatively small size of China, the country is experiencing a sharp depreciation rate in its exchange, which is causing severe credit crunch and large bank failures. This situation is causing a typical financial crisis or debt crisis, where we perceive a high level of risk due to the rising debt.


The government can also inject liquidity or capital to support the orderly restructuring of debt, as opposed to market-enforced deleveraging, which can be messy and result in overshoot. Additionally, the government can prevent a credit crunch by preventing banks from withdrawing credit or causing a credit crunch. The government’s ownership of banks and guarantees on deposits also helps to make banks more stable and unlikely to fail. In the case of China, where domestic savings are kept high and capital controls are in place, international investors’ sentiment does not significantly affect domestic deposits, which means that a debt crisis is more likely to be a liquidity crisis. Another important factor is that the government of China has substantial assets that can be used to help pay off debt.

In the end, the burden of nonperforming debt will fall on savers and the financial industry, resulting in the depletion of valuable resources. Inefficient and wasteful investments overshadow more productive and profitable ones, leading to reduced long-term growth, decreased corporate profitability and investment, and the misallocation of resources. The lack of market discipline to eliminate low returns or investment failures contributes to this issue. Nonproductive sectors are receiving an increasing portion of resources, and evidence indicates that debt has consistently outpaced output over an extended period. Nevertheless, it is important to acknowledge that China’s high and escalating debt level presents a significant problem.

What should Chinese leaders think about next when they learn lessons from China’s past? Your book tells the story of how China has managed its economy since 1978, which is now at a crossroads.

China’s leaders can learn from their own experiences in navigating past challenges. With the changing economic fundamentals and the external environment, China’s economy is now facing significant challenges.

In light of fresh challenges and altered circumstances, it is crucial to maintain a pragmatic and flexible approach, just as they have done previously, by modifying policy priorities and tools initially.

It is still crucial for China to continue benefiting from the exchange of international best practices, ideas, and talent, as well as further opening up to foreign investment and international trade, in order to stay open and competitive in the global arena.

Some examples include overhauling the fiscal system, providing assistance to the private sector, and implementing reforms for the hukou (household registration system) and state-owned enterprises (SOE) in order to address new challenges. These initiatives have been crucial in driving China’s rapid development, upholding market-oriented principles, and successfully implementing important reforms.