China: Why the country’s economy has stalled – and what the country desires to do about it

China’s annual parliamentary sessions The meetings in Beijing ended on March 11. They were carried out under great pressure: a weak economy and high expectations from each the domestic public and international observers about what the federal government can do to drag the economy out of the crisis.

The country’s leaders didn’t draw back from mentioning all of China’s economic problems. But in addition they sought to spice up the Chinese public’s morale by outlining how the country would move forward into the following chapter of China’s history – particularly by striving to turn into a world technology leader.

The government used the meetings to do that explain that GDP growth is targeted at 5% in 2024. This is lower than that 5.2% growth rate This was achieved in 2023, but is higher than the International Monetary Fund forecast of 4.6%. The Chinese government didn’t provide details on how it’s going to achieve this goal, however the goal itself is an indication that the leadership is confident in regards to the future.

Over the past 4 many years, China’s rapid economic growth has been attributed to market incentives, low-cost labor, infrastructure investment, exports and foreign direct investment. But on the time of writing, none of those drivers work effectively.

Market activities are intertwined stronger government intervention. A decline in population has weakened the labor supply. And uncertainty over China’s economy and heightened geopolitical tensions have combined to spur foreign investment from China. As of January 2024, foreign direct investment in China was lower than 10% of the $344 billion (£270 billion) the country received in 2021.

Real estate crisis

Many of the risks to the Chinese economy stem from the troubled real estate sector. For many years, China’s economy was depending on a booming real estate market driven by speculative investment returns. However, this growth was largely attributable to debt. To maximize their profits, developers even began selling houses before they were built.

China’s economy began to slow, and in 2020 Chinese regulators began to decelerate cracked down about reckless borrowing. Beijing has imposed sweeping lending restrictions on real estate developers, meaning they’ve been unable to borrow more cash to repay their existing debts.

A crisis followed. At the start of 2024, Evergrande – essentially the most indebted real estate developer on this planet – broke. And other major real estate developers are in trouble. country garden has defaulted and Vanke is struggling to search out the brand new loans it must survive.

The government reiterated its determination to deflate the housing bubble at its annual meeting. It didn’t highlight how more real estate developers may be shielded from default, but only suggested that there needs to be help to enable developers to finish real estate projects.

The current weak consumer demand in China’s economy is closely linked to the true estate crisis. The value of homes is much lower today than two years ago, raising fears in regards to the future value of private assets. Given weak social security, this has led to more precautionary saving and fewer consumption, resulting in an overall decline Decrease in price of products and services.

Demand for Chinese goods from abroad has also increased declining attributable to US and EU trade restrictions, geopolitical concerns and shocks in global supply chains. This explains why the federal government explicitly emphasized the necessity to strengthen the self-reliance of the Chinese economy at its annual meetings.

New growth drivers

The most striking phrase that got here out of the annual meetings was “recent quality productive forces.” There are different interpretations of the term, but all of them concentrate on technology and innovation.

Chinese officials specifically emphasized the necessity for China to strive to develop more artificial intelligence (AI)-related products. The government envisions applications similar to AI-powered travel agents and salespeople.

China has up to now been best known for its use of AI technologies. Beijing, Shanghai and Shenzhen are all Smart citieswhere advanced technologies similar to AI, cloud computing and massive data are utilized in various areas similar to transport, urban planning and public safety.

However, the transformation of China’s economy from one driven by investment and fueled by debt to 1 driven by innovation and technology will present some recent challenges.

First, innovation requires incentives and an institutional guarantee to reward risk-taking. Therefore, the private sector must grow faster. Research has found that the share of China’s private sector among the many 100 largest listed firms in China fell from 55.4% in mid-2021 to 36.8% at the tip of 2023.

Second, innovation requires more highly qualified human capital. A report The OECD concluded in 2021 that using AI technology increases the demand for expert staff, even though it replaces low-skilled staff. This can be difficult for China because the country’s growth has up to now been driven by low-skilled labor.

Third, high-tech industries similar to AI and digital services are energy intensive. China has already taken steps to diversify its energy supply, but securing energy supply chains can be crucial in the long run.

Increased geopolitical tensions and reshaped global supply chains It is feasible that exports of energy and other natural resources to China could also be reduced in the longer term. Many of those resources come from developing countries which have historically traded their resources for infrastructure investments from China. This is unlikely to be the case in the longer term.