Until recently China has been a dynamic positive driving force in the global economy with respect to both the demand for commodities and high-tech products as well as a major supplier of low-priced products. However, since the extreme lockdown policies during the pandemic, the Chinese economy has failed to rebound and has faced a number of significant challenges.
The most significant challenge is the collapse of the real estate and construction industry with actual and impending bankruptcies of leading construction companies. Construction was the driving force responsible for China’s impressive growth over the past 30 years[1], and the collapse of this market has left a huge vacuum in domestic demand.
Even though China’s growth rate is in the region of 5%, which for the UK or any EU country would be seen as enviable, for China it is insufficient to maintain the level of economic activity, and this is seen in the creeping deflation and dangerous rise in unemployment in the 18–25-year-old age group.
The road to deflation is shown in the following chart from the Economist[2].
The lack of domestic demand is partly due to the demographic changes with negative population growth and an ageing population as well as a drop in demand for Chinese exports as the rest of the world is experience slow or negative growth. The problem for the global economy is that as domestic spending in China falls there is a corresponding fall in the demand for raw materials which affects the exports of countries like Australia, Brazil and Canada as well as reduced demand for income elastic products of companies such as Apple, Burberry, Louis Vuitton and hundreds of other global companies.[3] This will have an effect on supply chains, production and employment throughout the global economy and could contribute to a global economic slowdown.
A related effect is the business pessimism that is created so that foreign direct investment in China will decline which will further impact falling demand. This in turn puts pressure on the exchange rate of the currency and further loss of confidence will generate capital flight that will intensify this pressure.
For developing countries such as many in Sub-Saharan Africa, which have borrowed extensively from China to finance infrastructure project, there is the prospect that China will call in its loans and/or fail to complete the infrastructure projects.
It should be noted however, that some economists and analysts consider the dangers of China’s slowdown for the global economy to be exaggerated and that the problem will be only temporary. There are in fact several reasons for optimism. A notable recent development has been the dramatic rise in the popularity and sales of Chinese made electric vehicles (EVs) and the leading Chinese manufacture of EVs, BYD has overtaken Tesla as the global leader in this field. Chinese companies are also dominant in the production of the batteries used for EVs and there are several new Chinese start-ups in this industry that will ensure Chinese dominance in the rapidly growing EV market.
[1] https://www.bbc.co.uk/news/business-66636403
[2] https://www.economist.com/finance-and-economics/2023/10/18/chinas-economy-may-be-growing-faster-but-big-problems-remain
[3] https://www.bbc.co.uk/news/business-66840367