The Faltering of the Chinese Economy

Joshua Lloyd

The end of September showed a worrying statistic for China’s economic growth. In the three months to the end of September, GDP grew by 4.6% on an annual basis. Whilst initially seeming a statistic to celebrate, this marks the second quarter in which China has missed their 5% annual GDP growth target. The reason this high growth target is so important in China is as a result of both demographics, and its issues with domestic consumption. On the demographic front, the next decade is set to have 300 million people in the 50 to 60 age group leave the workforce. Pension funds are running low in China, with a pre-pandemic 2019 estimate from the state-run Chinese Academy of Social Sciences, estimating the country’s main pension fund to run out by 2035. With this, China is already looking to raise the retirement age for the first time since the 1950s, with an increase from 60 to 63 for men. However, this still remains one of the lowest in the world. A strong component in causing this issue was the decades-long one-child policy. 

Whilst China still maintains its position as the world's largest exporter, domestically, sluggish consumption has caused significant problems in the Chinese economy. Low levels of household income and a high level of income inequality act as a constraint upon consumption. Household consumption as a share of GDP is 39%, far below that of OECD economies which average out at 54%. The desire to go out and spend can not even be spurred by the threat of inflation. Despite a reported 2-3% target rate of inflation, the CPI increased by 0.4% from a year in September, lower than the 0.6% rise in August. This raises the possibility of deflation, which would harm consumption levels even further as the opportunity of cheaper goods discourages spending. The ongoing housing crisis, which has persisted since 2020, has caused other issues with consumer confidence, with new house prices falling 5.3% from a year before in August 2024. Deeply indebted developers have led to half- complete crumbling apartment blocks and putting a strain on the financial system.

It is with these issues that China has started implementing a large amount of monetary and fiscal stimulus into the economy in grasping that 5% target rate. China’s central bank has cut interest rates in search of the magic 5% and in order to prevent debt-ridden property owners from reaching bankruptcy. Alongside this, other measures include debt swaps for local governments, reduced property market regulation and efforts to bolster the stock market. It remains to be seen whether these efforts will have the strong effect needed to get the Chinese economy back on track. For a sizable contingent of economists, the answer seems like a downright no- with The Guardian’s George Magnus going as far as to call it “the very definition of economic insanity”. In my opinion, ‘economic insanity’ is a step too far and the measures demonstrate that China is willing to take steps to address the issue. The current measures however, are not far enough, and if China hopes to avoid a Japanese style deflationary spiral and to avoid the 2020s being a ‘lost decade’ for the Chinese, more aggressive monetary and fiscal measures must be taken.