The Chinese economy has been hit hard by a string of negative developments over the past half year, including sluggish growth, record levels of youth unemployment, low levels of foreign investment, weak exports and currency, and a housing market that is in crisis.
Joe Biden, the Vice President of the United States, recently referred to the economy of the world's second-largest country as "a ticking time bomb," warning that public dissatisfaction will continue to rise.
In response, the leader of China, Xi Jinping, defended the "strong resilience, tremendous potential, and great vitality" of the economy.
Who then has the better argument, Mr. Biden or Mr. Xi? As is so frequently the case, the answer is most likely to be found somewhere in the middle.
China is facing enormous challenges that have their roots deep in the ground, despite the fact that the economy is not likely to collapse anytime in the near future.
A housing shortage combined with lower-income households
The country's real estate market lies at the heart of China's ongoing economic woes. Up until quite recently, a third of its total wealth was held in the form of real estate.
"Nothing about this made any sense. This makes absolutely no sense at all, according to Antonio Fatas, an economics professor at the INSEAD business school in Singapore.
Over the course of two decades, the industry flourished as a result of developers riding a wave of privatization. However, the problem didn't start until 2020. A widespread epidemic and a population decline within one's own country are not favorable conditions for an unrelenting program of housebuilding.
The government, fearing a financial collapse similar to the one that occurred in the United States in 2008, then placed limits on the amount of money that developers could borrow. They quickly ran up billions of dollars in debt that they were unable to repay.
Now that demand for houses is significantly lower, property prices have significantly decreased. As a result, Chinese homeowners, who had been subject to stringent coronavirus limitations for the previous three years, are now in a worse financial position.
"In China, property is effectively your savings," explains Alicia Garcia-Herrero, head Asia economist for the asset management firm Natixis. Up until very recently, it appeared to be a better option than investing your money in the unpredictable stock market or in a bank account with poor interest rates.
This indicates that, in contrast to the countries of the West, there has been neither a huge spending boom nor a major economic bounce back after the pandemic.
"There was this notion that Chinese people would spend like crazy after zero-Covid," Ms. Garcia-Herrero recalls. "There was this notion that Chinese people would spend after zero-Covid." "They'd go on vacation, visit Paris, and purchase the Eiffel Tower. But in reality, they were well aware that the decline in house values would put a significant dent in their savings, and as a result, they have made the decision to save whatever cash they have on hand.
Not only has this circumstance given the impression that households are in a worse financial position, but it has also contributed to the worsening of the debt crisis that the country's local governments are currently experiencing.
It is estimated that more than one third of their multi-billion dollar sales come from selling land to developers, which is an industry that is currently experiencing a crisis.
It is anticipated that it will be several years before the current turmoil in the housing market begins to ease.
A faulty model of the economic system
The real estate crisis has also brought to light weaknesses in China's economy and the way it operates.
Building was the driving force behind the country's phenomenal economic expansion during the past three decades. Construction was responsible for everything from industries and airports to residences, bridges, and train lines.The execution of this task falls under the purview of the various municipal governments.
Nevertheless, there are some economists who claim that this strategy is beginning to hit a brick wall, both figuratively and physically.
Yunan province in China, which is located close to the border with Myanmar, is home to one of the more peculiar manifestations of China's compulsive need to construct new structures. This year, officials there affirmed, for some inexplicable reason, that they would go forward with plans to build a new Covid-19 quarantine facility that would cost multiple millions of dollars.
The amount of pressure that is being put on heavily indebted local governments is so great that this year it was revealed that some of them were selling land to themselves in order to fund building programs.
The fact of the matter is that there is a limit to the amount of infrastructure that China can construct before it begins to be a financial drain. The nation must look into new means of providing prosperity for its population in order to move forward.
Professor Fatas believes that "we're at an inflection point" at the moment. "The old model is ineffective, but in order to shift focus, serious structural and institutional reforms are required."
For instance, he contends that if China desired to have a financial sector that could fire up its economy and compete with those of the United States or Europe, the Chinese government would first need to significantly relax regulation, giving a significant amount of authority to private interests.
In point of fact, the reverse has come to pass. The Chinese government has tightened its control over the financial industry, chastised "westernised" bankers for their hedonistic behavior, and increased pressure on large technological companies such as Alibaba.
The high unemployment rate among young people is one manifestation of this phenomenon. Millions of college grads across China are having trouble finding respectable white-collar work in the country's major cities.
Figures from July showed that the unemployment rate for job searchers between the ages of 16 and 25 reached a record high of 21.3%. The decision to stop publishing the numbers was made public by the relevant authorities the following month.
Professor Fatas believes that this is evidence of a "rigid, centralized economy" that is finding it difficult to accommodate such a large number of people into the labor field.
When it comes to constructing a new bridge, a top-down approach is the most efficient method; but, when the bridge in question has already been constructed but people are still looking for work, this approach appears to be tedious.
What actions will the government take in this situation?
A shift in the way we think about politics is necessary for an economic course correction. It doesn't appear that this will happen, given how recently the Chinese Communist Party (CCP) has been increasing its grasp on everyday life and how President Xi has been tightening his grip on the CCP. There is a possibility that those in charge will argue that it is not even required.
China is, in some senses, a victim of its own success as a nation. The current pace of growth is only regarded as "slow" when measured against the staggeringly high numbers recorded in earlier years.
China's annual GDP has increased by almost 9% on average every year since 1989. It is anticipated that this figure will be at around 4.5% in 2023.
It is a significant decrease, but it is still far higher than the economies of the United States, the United Kingdom, and most of the countries in Europe. Some people hold the opinion that this situation is ideal for China's top leadership.
The spending of individuals is typically the primary driver of economies in the West, but Beijing is suspicious of the consumerist paradigm. Not only is it seen to be wasteful, but it also demonstrates a strong sense of individualism.
It may assist to stimulate the economy if consumers are allowed to purchase new televisions, subscribe to streaming services, or go on vacation; yet, this does little to improve China's national security or its competitiveness with the United States.
Mr. Xi's ultimate goal is growth, but not expansion simply for the sake of expansion. It's possible that this is what's behind the current boom in cutting-edge industries like semiconductors, artificial intelligence, and green technology. These are all things that keep China globally competitive and make it less dependent on other countries and companies.
This concept may also shed light on why the government has taken such a muted response to the weakening economy. Instead of pouring enormous sums of money into the economy, all that has been done so far is some minor adjustments, such as loosening restrictions on borrowing or lowering interest rates by a fraction.
Investors from other countries who have money invested in China are understandably concerned and want the Chinese government to respond swiftly, but those in power appear to be playing the long game.
They are aware that, conceptually speaking, China still possesses a tremendous capacity for even further economic expansion. Even though it is an economic powerhouse, the annual income of its residents is only $12,850 on average. There are still about 40 percent of people who choose to live in rural areas.
Therefore, on the one hand, China has been afforded and will continue to be afforded the luxury of taking such a long-term view since it is not linked to election cycles.
On the other hand, many economists are of the opinion that a political system that is authoritarian cannot coexist with the kind of flexible and open economy that is required to achieve living standards that are comparable to those of nations that are classified as having "high income."
It is possible that Mr. Xi places an emphasis on ideology above efficient governance, or control over pragmatism. These are both potential outcomes.
When the economy is functioning well, this is often acceptable for the vast majority of people. But now that China is emerging from three years of zero-Covid, with many people finding it difficult to find work and the value of family homes plummeting, the narrative is very different.
This brings us back to Mr. Biden's "ticking time bomb" statement, which hints at the possibility of civil upheaval or, even more gravely, some type of dangerous action taken in response to it on the international front.
However, at this point in time, that is nothing but speculation. China has successfully navigated its way out of a variety of crises in the past. However, there is no question that the leadership of the country is currently confronted with a particular set of difficulties.
Are they concerned about the way things are currently going? "Of course, they are aware of the statistics," explains Professor Fatas.
"Are they conscious of the tasks that must be completed? I can't say for sure. My best opinion is that they are overlooking a few things that are absolutely necessary for the development of China.
Joe Biden, the Vice President of the United States, recently referred to the economy of the world's second-largest country as "a ticking time bomb," warning that public dissatisfaction will continue to rise.
In response, the leader of China, Xi Jinping, defended the "strong resilience, tremendous potential, and great vitality" of the economy.
Who then has the better argument, Mr. Biden or Mr. Xi? As is so frequently the case, the answer is most likely to be found somewhere in the middle.
China is facing enormous challenges that have their roots deep in the ground, despite the fact that the economy is not likely to collapse anytime in the near future.
A housing shortage combined with lower-income households
The country's real estate market lies at the heart of China's ongoing economic woes. Up until quite recently, a third of its total wealth was held in the form of real estate.
"Nothing about this made any sense. This makes absolutely no sense at all, according to Antonio Fatas, an economics professor at the INSEAD business school in Singapore.
Over the course of two decades, the industry flourished as a result of developers riding a wave of privatization. However, the problem didn't start until 2020. A widespread epidemic and a population decline within one's own country are not favorable conditions for an unrelenting program of housebuilding.
The government, fearing a financial collapse similar to the one that occurred in the United States in 2008, then placed limits on the amount of money that developers could borrow. They quickly ran up billions of dollars in debt that they were unable to repay.
Now that demand for houses is significantly lower, property prices have significantly decreased. As a result, Chinese homeowners, who had been subject to stringent coronavirus limitations for the previous three years, are now in a worse financial position.
"In China, property is effectively your savings," explains Alicia Garcia-Herrero, head Asia economist for the asset management firm Natixis. Up until very recently, it appeared to be a better option than investing your money in the unpredictable stock market or in a bank account with poor interest rates.
This indicates that, in contrast to the countries of the West, there has been neither a huge spending boom nor a major economic bounce back after the pandemic.
"There was this notion that Chinese people would spend like crazy after zero-Covid," Ms. Garcia-Herrero recalls. "There was this notion that Chinese people would spend after zero-Covid." "They'd go on vacation, visit Paris, and purchase the Eiffel Tower. But in reality, they were well aware that the decline in house values would put a significant dent in their savings, and as a result, they have made the decision to save whatever cash they have on hand.
Not only has this circumstance given the impression that households are in a worse financial position, but it has also contributed to the worsening of the debt crisis that the country's local governments are currently experiencing.
It is estimated that more than one third of their multi-billion dollar sales come from selling land to developers, which is an industry that is currently experiencing a crisis.
It is anticipated that it will be several years before the current turmoil in the housing market begins to ease.
A faulty model of the economic system
The real estate crisis has also brought to light weaknesses in China's economy and the way it operates.
Building was the driving force behind the country's phenomenal economic expansion during the past three decades. Construction was responsible for everything from industries and airports to residences, bridges, and train lines.The execution of this task falls under the purview of the various municipal governments.
Nevertheless, there are some economists who claim that this strategy is beginning to hit a brick wall, both figuratively and physically.
Yunan province in China, which is located close to the border with Myanmar, is home to one of the more peculiar manifestations of China's compulsive need to construct new structures. This year, officials there affirmed, for some inexplicable reason, that they would go forward with plans to build a new Covid-19 quarantine facility that would cost multiple millions of dollars.
The amount of pressure that is being put on heavily indebted local governments is so great that this year it was revealed that some of them were selling land to themselves in order to fund building programs.
The fact of the matter is that there is a limit to the amount of infrastructure that China can construct before it begins to be a financial drain. The nation must look into new means of providing prosperity for its population in order to move forward.
Professor Fatas believes that "we're at an inflection point" at the moment. "The old model is ineffective, but in order to shift focus, serious structural and institutional reforms are required."
For instance, he contends that if China desired to have a financial sector that could fire up its economy and compete with those of the United States or Europe, the Chinese government would first need to significantly relax regulation, giving a significant amount of authority to private interests.
In point of fact, the reverse has come to pass. The Chinese government has tightened its control over the financial industry, chastised "westernised" bankers for their hedonistic behavior, and increased pressure on large technological companies such as Alibaba.
The high unemployment rate among young people is one manifestation of this phenomenon. Millions of college grads across China are having trouble finding respectable white-collar work in the country's major cities.
Figures from July showed that the unemployment rate for job searchers between the ages of 16 and 25 reached a record high of 21.3%. The decision to stop publishing the numbers was made public by the relevant authorities the following month.
Professor Fatas believes that this is evidence of a "rigid, centralized economy" that is finding it difficult to accommodate such a large number of people into the labor field.
When it comes to constructing a new bridge, a top-down approach is the most efficient method; but, when the bridge in question has already been constructed but people are still looking for work, this approach appears to be tedious.
What actions will the government take in this situation?
A shift in the way we think about politics is necessary for an economic course correction. It doesn't appear that this will happen, given how recently the Chinese Communist Party (CCP) has been increasing its grasp on everyday life and how President Xi has been tightening his grip on the CCP. There is a possibility that those in charge will argue that it is not even required.
China is, in some senses, a victim of its own success as a nation. The current pace of growth is only regarded as "slow" when measured against the staggeringly high numbers recorded in earlier years.
China's annual GDP has increased by almost 9% on average every year since 1989. It is anticipated that this figure will be at around 4.5% in 2023.
It is a significant decrease, but it is still far higher than the economies of the United States, the United Kingdom, and most of the countries in Europe. Some people hold the opinion that this situation is ideal for China's top leadership.
The spending of individuals is typically the primary driver of economies in the West, but Beijing is suspicious of the consumerist paradigm. Not only is it seen to be wasteful, but it also demonstrates a strong sense of individualism.
It may assist to stimulate the economy if consumers are allowed to purchase new televisions, subscribe to streaming services, or go on vacation; yet, this does little to improve China's national security or its competitiveness with the United States.
Mr. Xi's ultimate goal is growth, but not expansion simply for the sake of expansion. It's possible that this is what's behind the current boom in cutting-edge industries like semiconductors, artificial intelligence, and green technology. These are all things that keep China globally competitive and make it less dependent on other countries and companies.
This concept may also shed light on why the government has taken such a muted response to the weakening economy. Instead of pouring enormous sums of money into the economy, all that has been done so far is some minor adjustments, such as loosening restrictions on borrowing or lowering interest rates by a fraction.
Investors from other countries who have money invested in China are understandably concerned and want the Chinese government to respond swiftly, but those in power appear to be playing the long game.
They are aware that, conceptually speaking, China still possesses a tremendous capacity for even further economic expansion. Even though it is an economic powerhouse, the annual income of its residents is only $12,850 on average. There are still about 40 percent of people who choose to live in rural areas.
Therefore, on the one hand, China has been afforded and will continue to be afforded the luxury of taking such a long-term view since it is not linked to election cycles.
On the other hand, many economists are of the opinion that a political system that is authoritarian cannot coexist with the kind of flexible and open economy that is required to achieve living standards that are comparable to those of nations that are classified as having "high income."
It is possible that Mr. Xi places an emphasis on ideology above efficient governance, or control over pragmatism. These are both potential outcomes.
When the economy is functioning well, this is often acceptable for the vast majority of people. But now that China is emerging from three years of zero-Covid, with many people finding it difficult to find work and the value of family homes plummeting, the narrative is very different.
This brings us back to Mr. Biden's "ticking time bomb" statement, which hints at the possibility of civil upheaval or, even more gravely, some type of dangerous action taken in response to it on the international front.
However, at this point in time, that is nothing but speculation. China has successfully navigated its way out of a variety of crises in the past. However, there is no question that the leadership of the country is currently confronted with a particular set of difficulties.
Are they concerned about the way things are currently going? "Of course, they are aware of the statistics," explains Professor Fatas.
"Are they conscious of the tasks that must be completed? I can't say for sure. My best opinion is that they are overlooking a few things that are absolutely necessary for the development of China.
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