What Happens If China’s Economy Collapses?

China's leader Xi Jinping meets U.S. President on the sidelines of the G-20 Summit in Nusa Dua on the Indonesian resort island of Bali on Nov. 14, 2022. Saul Loeb/AFP via Getty Images

China, home to a population of over 1.4 billion, is the world’s second-largest economy, with the nation experiencing an average annual growth rate of 6.7 percent since 2012, driven in part by its dominance in manufacturing and its cheap exports of goods.

As of 2022, China had a GDP of $17.7 trillion, just behind the United States with a GDP of $22.9 trillion. Many economists have forecast that the former will become the world’s biggest economy by 2030.

However, the country’s economy has been steadily losing momentum this year as it adapts to a strict zero-COVID strategy. As a result, business and consumer activity within the country has effectively ground to a halt, much like it did in the early stages of the pandemic, while global demand has dropped and unemployment among youth has soared.

Adding to the country’s woes is a Chinese regime clampdown on the debt of property developers which has seen authorities tighten home-purchase rules and cap lending from banks, while urging powerful property tycoons to pour resources and influence into backing Beijing’s interests.

This prompted a housing market crash that has further hurt the economy over the past year.

Meanwhile, the country’s GDP expanded by just 0.4 percent year-over-year in the second quarter, and although it rose 3.9 percent in the third quarter, many economists believe the economic situation for China is set to get worse, increasing the chances of a global recession.

Is China’s Economy Falling?

China’s current economy is slowing, with industrial output rising 5 percent year-over-year in October, missing out on market expectations of 5.2 percent growth and slowing from September’s industrial production expansion of 6.3 percent.

Meanwhile, retail sales, a gauge of consumption, fell by 0.5 percent in the month of October; the first time they have done so since May when they fell by 6.7 percent after Shanghai, the country’s largest business center, was placed under a city-wide lockdown.

Elsewhere, property investment fell 16 percent year-on-year in October, marking the biggest largest drop since the January–February period in 2020, according to an analysis by Reuters based on data from the National Bureau of Statistics.

Additionally, the country is suffering from a severely devalued currency this year.

Adding to its woes, the International Monetary Fund (IMF) in October cut its forecast for China’s 2022 GDP growth to 3.2 percent, marking its second-lowest level since 1977, and well below the Chinese regime’s 5.5 percent target that it announced in March.

The IMF said the slashed forecast reflected the “impact of the zero-COVID lockdowns on mobility and the crisis in the real estate sector.”

China’s Real Estate Collapse 2021

China’s GDP grew 8.1 percent year-on-year to 114.37 trillion yuan (about $18 trillion) in 2021, matching economists’ expectations.

However, economic activity significantly slowed down in the latter part of the year, a trend that has continued for much of this year.

Yet amid a global pandemic and increasingly fraying relations with the United States and other major economies, 2021 will no doubt be remembered for China’s crippling housing market crisis, which still threatens to have financial implications for the wider economy today.

Beijing initiated a large-scale clampdown on developer debt in 2021 in an effort to reign in the market, but the move left developers struggling.

China’s property company Evergrande, then the country’s second-biggest property developer, warned investors on multiple occasions that it would likely default on its debt payments, worth a staggering $300 billion. Eventually, that’s exactly what it did. Soon after, other property developers such as Kaisa and Shimao followed suit.

That had a knock-on effect on the real estate industry as a whole, creating a housing slump under which property sales plunged and many homeowners refused to pay their mortgages on properties that had not yet finished construction.

As a result, the property sector, which accounts for one-fifth of China’s GDP, suffered huge losses.

In a sign of more problems to come, Country Garden, China’s largest property developer, reported that its profit in the first half of 2022 plummeted by 96 percent, down $89 million during the first six months of 2022 compared to the $2.2 billion it reported during the same time period in 2021.

In an effort to kickstart the property industry again, Beijing has pledged billions of dollars—approximately 200 billion yuan ($27 billion)—in loans to help cash-strapped developers finish construction on projects.

China’s Economy in Trouble

At a press conference in Beijing earlier this month, Fu Linghui, spokesperson for the National Bureau of Statistics, acknowledged that China’s strict COVID pandemic containment measures were placing “huge” pressure on China’s current economy, noting that risks to the global economy were rising.

“The impact from the triple pressures on economic operations—shrinking demand, supply shocks, and weakening expectations—is growing,” said Fu.

Still, Fu believes China’s economy will likely recover steadily, noting that the country’s economic performance so far this year has shown resistance, despite a resurgence in COVID outbreaks and weakening demand.

The Chinese Communist Party (CCP), meanwhile, has rolled out a number of stimulus measures in an effort to prop up the economy, including a 1 trillion yuan ($146 billion) package announced in August aimed at improving infrastructure, boosting small businesses and real estate, easing power shortages, providing drought relief, and securing rice production during the important mid-season harvest, among others.

In October, the IMF revised its growth forecast for China’s economy in the next two years, lowering its 2023 GDP forecast to 4.4 percent from the original 4.6 percent, noting that a “worsening of China’s property sector crisis could undermine growth.”

What Happens If China's Economy Collapses? shutterstock

Centrally Planned Economy

China was previously a centrally planned economy, also known as a command economy or communist economy, under which economic decisions, including those regarding the production and distribution of goods and the allocation of resources, were made by the regime rather than by market participants or autonomous agents.

This approach was maintained from 1949, when the People’s Republic of China was established, until the end of 1978.

Does China Have a Mixed Economy?

China transitioned to a mixed economy, a system that blends aspects of both capitalism and communism, following the end of the Maoist period.

Under the current economic system, there are both private companies and regime or state-owned entities that coexist, and certain levels of economic freedom are applied regarding the use of capital.

However, regime intervention is still applied in certain areas of the economy, such as in public services and welfare, in order for the country to achieve its social aims.

Deng Xiaoping, former leader of the CCP from December 1978 to November 1989, famously called the system “socialism with Chinese characteristics.”

However, China’s current leader Xi Jinping—who recently secured a third term as head of the CCP—later declared a “new era” of socialist modernization for China under which the CCP has seemingly loosened control over the country’s economy but remains in charge of society in general.

How China’s economy will fare going forward is hard to predict. However, if it were to experience a true collapse, it would have a devastating knock-on effect on the rest of the world, particularly with regard to foreign trade and financial markets. Although whether these effects are long-lasting or short-term is even harder to predict given the current volatile state of the global economy.