6 reasons why the Chinese economy is sputtering This comparative test shows: The price differences between neobanks are large

The West and China reacted completely differently to the shock of the pandemic: in the West, an economic slump was offset by massive government support programs. That worked pretty well. A depression like the 1930s could be avoided and the economy recovered surprisingly quickly from the Covid shock. The only fly in the ointment: inflation unexpectedly shot up.

China is not worried about inflation, in fact the Bank of China is currently experiencing mild deflation. However, Beijing has a much more serious problem: its economy is weakening. In the second quarter, gross domestic product (GDP) grew by only 0.8 percentage point, downright meager by Chinese standards.

In addition, youth unemployment, which was already at a record high, has risen again. One in five Chinese women and one in five Chinese between the ages of 16 and 24 are now unemployed. Carlos Casanova, Asia specialist at Union Bancaire Privée, stated in the “Financial Times”: “This bodes badly for attitudes to life, stability and general prosperity. The responsible authorities must quickly find the means to solve the problem of youth unemployment.”

These are the reasons for the weak development of the Chinese economy:

1. Economic Policy

Beijing has responded to the weakness of the global economy in the aftermath of the financial and euro crisis with a major infrastructure investment program. It worked, but the price was a huge national debt. The individual provincial governments in particular complain about empty treasuries.

Beijing has therefore not responded to the Covid crisis with a so-called “bazooka”. Economists like to use this phrase for government investment programs. On the contrary, to rebalance public finances, President Xi Jinping has ordered austerity measures in the country.

“The Chinese economy is clearly faltering,” notes Esward Prasad, a trade professor at Cornell University, in the Wall Street Journal. Given this fact, it is conceivable that despite high debts, Xi will soon have to resort to the bazooka again.

2. Real estate crisis

The still ailing situation in the Chinese real estate market is the main reason why management has tightened the austerity rules. After the spectacular crash of real estate giant Evergrande, the situation seemed to stabilize somewhat, but the latest data is again worrying. The “Financial Times” reports that prices fell another 1.4 percent in June in 25 major cities. This dampens contractors’ desire to tackle new projects and consumers’ desire to buy. There are still many unfinished construction projects in China.

3. Covid hangover

As is well known, Beijing responded to the pandemic with a strict lockdown policy. First with success. The number of Covid deaths was well below that of the West. President Xi saw this as a sign of the superiority of the Chinese model.

Meanwhile, Xi has become meek about Covid. China had to end its lockdown policies overnight. The resentment of the populace had become too great. The economic damage is also too great.

4. Stagnant consumption

As mentioned, Beijing has refrained from supporting consumer programs. This has led to general uncertainty and a vicious circle. Because consumption is stagnating, there is also a lack of investment. “Order intake and profits have been falling for 16 months, so there is a lack of confidence,” said Tao Wang, chief economist at UBS. “Companies have overcapacity and therefore don’t feel like expanding further.”

5. Falling exports

Tensions between the US and China and Putin’s war in Ukraine weighed on Chinese exports. A decoupling with the West will not come soon, the interdependence is too great. But the de-risking, which is now being talked about everywhere, is already leaving clear traces.

The Chinese bureau of statistics has just announced that exports fell by 8.3 percent in June compared to a year earlier. Spokeswoman Fu Linghui said: “It should be understood that the political and economic conditions for a sustainable recovery are quite complicated at the moment.”

The fact that Janet Yellen, the US Treasury Secretary, was recently received very warmly in Beijing indicates that the Chinese government has an interest in improving its relations with the West.

6. Battle against IT billionaires

For a long time, the Chinese Communist Party had no problem with private entrepreneurs becoming rich and powerful, especially in the IT sector. The prototype is Jack Ma, the founder of Alibaba. Not only is he very rich, but he has also become world famous.

About two years ago, however, Beijing began clipping the wings of the new IT oligarchs. For example, Ma’s attempt to list his financial group Ant was abruptly halted. The entrepreneur then largely disappeared from the public eye.

In the meantime, an agreement seems to have been reached with Ma & Co. Prime Minister Li Qiang, the official number two, has met with officials from ByteDance, TikTok’s parent company, and other top executives, promising the government will restore relations to normal.

But the fact remains: China is experiencing a bad economic year. Murphy Cruise, chief economist at Moody’s Analytics, explains in the Wall Street Journal: “The Chinese economic recovery is going from bad to worse. The year 2023 seems to be a lost year for China.”