The Days of China’s Fast Growth Are Done

The Days of China’s Fast Growth Are Done
Cranes and shipping containers at Lianyungang Port, Jiangsu Province, China, on July 16, 2023. (STR/AFP via Getty Images)
Antonio Graceffo

China’s economy is slowing, and the old growth model won't work. For Chinese leader Xi Jinping to restore the economy, he'll have to dramatically change the existing system—something he's unlikely to do.

Currently, foreign direct investment is decreasing, the yuan is losing value, and exports are declining. Regulations are increasing, making it more difficult for the private sector to operate. There's tremendous youth unemployment. The population is both aging and shrinking. Tourism and arrivals are down. The banking sector is facing a major debt bubble centered around overpriced, oversupplied, and unsold real estate. Moreover, China is facing food insecurity.
The Chinese growth model that previous leaders used during the heyday of rapid growth from 1980 to 2010 won't work. At that time, only about 20 percent of the population was urban. Moving hundreds of millions of farmers to the cities and putting them to work in factories caused China’s economy to explode. But now the country is about 63 percent urbanized, so there are fewer people to move to the cities. Additionally, some will have to remain in the countryside and grow food to ensure that the country has sufficient food supplies. China is able to grow only 65.8 percent of the food it needs and relies on imports to make up the shortfall. Removing people from the countryside would make China even more dependent on imports, something Mr. Xi doesn't want. The Chinese leader knows that he needs to make the nation's food supply self-sufficient before attempting an invasion of Taiwan. Otherwise, the U.S. 7th Fleet could cut off China’s food deliveries from overseas.
Another issue with urbanization as a means of growing the economy is that China already has roughly 295 million migrant workers. These are countryside people traveling to the cities to work in factories. Officially, moving them to the city won't significantly increase the gross domestic product (GDP). Any talk of growing the economy through urbanization presupposes that there are jobs for the newcomers when they arrive in the cities. But exports and manufacturing are trending down, which is why the cities are now full of jobless youth.
 Migrant workers standing near signs advertising their skills as they wait by a street to be hired in Shenyang, Liaoning Province, China, on Feb. 6, 2023. (STR/AFP via Getty Images)
Migrant workers standing near signs advertising their skills as they wait by a street to be hired in Shenyang, Liaoning Province, China, on Feb. 6, 2023. (STR/AFP via Getty Images)
Foreign direct investment (FDI) was one of the engines of growth during China’s economic rise. FDI would bring in much-needed foreign currency while also creating jobs. The problem is that FDI is down by 87 percent this year. Foreign companies and investors don't see any advantage in investing in China. The Foreign Relations Law and the Counterespionage Law greatly increase the risk of being arrested for something as innocent as conducting due diligence or a market survey. Meanwhile, the slowing economy offers less of an upside potential for foreign companies.
At the same time, China’s demographic crisis means there are fewer young people to sell to. Last year, China’s population officially decreased by 850,000 people. Over the next five years, roughly 27 percent of the population will be eligible for retirement. The workforce is shrinking, and manufacturing in China for export is also becoming less attractive. Consequently, investment is increasingly redirected toward Vietnam, India, and Indonesia.

When China was growing at its fastest pace, Beijing invested in infrastructure. Debt was used to build roads and railroads connecting major cities. Domestic economic activity increased, and people became richer. Today, first-, second-, and third-tier cities are already connected. Some existing highways could be upgraded, and stretches of standard rail could be replaced with high-speed railway lines. Still, this won't have much effect, if any, on GDP. Connecting the smallest and most remote cities with high-speed railways makes little economic sense.

Increased infrastructure investment would add to China’s debt. The country’s debt-to-GDP ratio is close to 300 percent. Real estate accounts for 25 percent of the debt held by Chinese banks, with the sector’s total debt standing at $8.4 trillion. Creating more debt won't help rescue the economy. After years of unbridled lending and building, China’s real estate sector is plagued with defaults. One of the country’s largest developers, Evergrande, has already filed for bankruptcy protection in the United States. Another large property company, Country Garden, needed a 30-day grace period to make $22.5 million in bond interest payments. China’s largest state-owned banks have reported that nonperforming loans are up by 7.6 percent since January.

The old way clearly isn't working. If he wants to save the economy, Mr. Xi will have to come up with a new paradigm. Repealing draconian restrictions and anti-spying laws might help increase investor confidence. Removing government protections and allowing market forces to tear through the property sector would help to simultaneously burst the debt bubble and make homes more affordable. Furthermore, a lack of government intervention in banking would force banks to make responsible lending decisions, which would improve the country’s future economic health. But reducing his control of the economy doesn't seem to be an option that Mr. Xi is even considering.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
Antonio Graceffo, Ph.D., is a China economic analyst who has spent more than 20 years in Asia. Mr. Graceffo is a graduate of the Shanghai University of Sport, holds a China-MBA from Shanghai Jiaotong University, and currently studies national defense at American Military University. He is the author of “Beyond the Belt and Road: China’s Global Economic Expansion” (2019).