ANALYSIS: More Sad News on China’s Economy

Just about every indicator speaks of China’s troubled economy, with few options left for Beijing

A woman rides a scooter past the construction site of an Evergrande housing complex in Zhumadian, central China's Henan Province, on Sept. 14, 2021. Jade Gao/AFP via Getty Images

News Analysis

The latest raft of economic indicators confirms the sorry state of China’s economy. The second quarter’s gross domestic product (GDP) disappointed both official and unofficial expectations.

All sectors lagged, though some were worse than others. Meanwhile, Beijing has few options to quickly regain the country’s economic momentum.

Official figures on the spring quarter’s GDP record 6.3 percent real growth from the second quarter a year ago. That might seem like a strong showing, but it is more a reflection of how depressed the economy was in early 2022 than any recent momentum. Real GDP in the second quarter was only 0.8 percent above the first quarter figure, a major slowdown from the quarterly growth of 2.2 percent recorded in that first quarter.

The brief January-March surge reflected a jump in consumer spending, especially among the wealthy, when Beijing finally gave up the zero-COVID policy of seemingly endless lockdowns and quarantines. But even as that consumer spending flow was taking place, the evidence behind the aggregates signaled that the bright picture was false. Now more recent figures confirm how weak the economy always was.

Lack of Consumer Confidence

The more recent weakness was evident in June’s consumer spending figures. May, still reflecting the post-zero-COVID exuberance, showed a 12.7 percent growth in retail sales, but June saw a very modest advance of only 3.1 percent. This shortfall reflects other signs that the Chinese householder has lost confidence amid the news of declining real estate values and because the zero-COVID lockdowns raised questions about the average working person’s ability to earn consistently. Instead of spending, fearful and wary Chinese householders are socking money away in savings. Household savings deposits rose some 18 percent during the first half of 2023.

Shoppers at an open-air market in Shenyang, China's northeast Liaoning Province, on July 10, 2023. STR/AFP via Getty Images

This lack of consumer confidence seems to have much to do with Beijing’s past policies. The misguided and overly severe COVID-19 policy has contributed to the sour feeling among all but the wealthiest Chinese. The fall in real estate values reflects past planning mistakes as well. The authorities have gone out of their way to blame the real estate collapse on private developers, many of whom have gone bankrupt, including the giant, Evergrande.

But though the managements of these firms were hardly prudent, most of the economy’s real estate problems and those of the now defunct developers lie in Beijing’s years-long stress on residential real estate development—a push that, as recently as 2021, had inflated the sector to what economists consider an unsustainable 25 percent of the economy. Years of excessive building, often in places chosen by central planners instead of from market signals, created the distorted and excessive building that has led directly to the fall in property prices.

Private Sector

Beijing can also look to itself to explain the shortfall in business investment. Until recently, Chinese leader Xi Jinping has spoken of a need for China to recapture its Marxist principles. He and his associates in the Chinese Communist Party (CCP) have roundly attacked private businesses and their owners, suggesting that they are somehow evil for pursuing profits and market signals instead of CCP objectives.

Such rhetoric could not help but dispirit private business owners and managers and instill a reluctance to expand, hire, and invest. There is little available evidence, but the situation probably induced many to find havens for their assets overseas outside Mr. Xi’s control.

More recently, Mr. Xi, aware of the economy’s weakness, has changed his tune, referring to entrepreneurs as “our own people.” So far, however, the wariness among businesspeople remains. Over the past six months, investment spending by private businesses has actually shrunk, and the pace of decline has accelerated month to month.

The other major drag on China’s economy, foreign trade, is less directly linked to Beijing’s policies. Europe is in recession, and the United States, though still growing, has a far from robust economy. The lack of buying by these economies and perennially-weak Japan has depressed Chinese exports—still the mainstay of the economy—throughout the spring quarter and some 12.4 percent in June alone.

For years, the CCP’s planners have discussed reorienting China’s economy from its overwhelming reliance on exports. But they have failed to act. Whether voiced by Mr. Xi or others of lesser rank in Beijing’s hierarchy, the effort has gone mostly into rhetoric and less into policy. Had Beijing acted, China might be less sensitive to overseas economic matters than it clearly is today.

‘Counter-Cyclical Adjustments’

This disappointing economic performance has elicited calls—inside and outside China—for redoubled stimulus efforts. The People’s Bank of China (PBOC) has cut interest rates more than once, and PBOC Deputy Governor Liu Guoqiang has promised more “counter-cyclical adjustments.” 

Beijing has also turned to its standard source of stimulus: infrastructure spending. After a splurge in 2022, public investment spending has continued to increase sharply, growing 8.1 percent over the January-June period.

But it is not apparent what these efforts can do. Given the lack of confidence among Chinese consumers and businesses, it remains an open question whether targeted tax breaks on electric vehicles and the like or lower borrowing rates can generate much more activity. And if past infrastructure efforts have thus far failed to create more economic momentum, what promise can still be made of the same offer?

Wherever the blame, it should be apparent by now that the CCP no longer directs the economic juggernaut it once did. Whether the Party admits it or not, China will likely miss the regime’s 5 percent growth target for this year. Growth in the future will proceed at a much slower pace than the one to which China and the world have grown accustomed. Much is due to the failures of the centrally planned structure that Beijing has embraced—in general and increasingly in recent years.