The end of the COVID-19 lockdowns will help the Chinese economy recover.
Still, it won’t solve the country’s three major problems: the bursting housing bubble, mounting debt, and crumbling population pyramid that are undermining the country’s long-term growth prospects.
David Yu, a professor of finance at New York University in Shanghai, sees a good year ahead for the Chinese economy after COVID-19 restrictions were lifted on Jan. 8.
“There is optimism in the air as previous economic drivers such as lockdowns have been eased and local governments are now fully focused on the economy and fully focused on boosting the economy,” he said International business hours. “We’ve now seen a reach for foreign investment and touring visits that hasn’t been seen in a while.”
Yu sees growth opportunities in industries that will benefit from the opening up of the economy, such as tourism and related industries. “They are primed for a big upswing compared to the doldrums of the last few years,” he said.
Professors Allen J. Morrison and Stewart Black, authors of the forthcoming book Enterprise China: Adopting a Competitive Strategy for Business Success, see a good year ahead for the Chinese economy.
“It’s easy to be optimistic that the Chinese economy will do better in 2023 than in 2022,” they said. “Chinese companies are recalling workers and adding shifts, motivated by pent-up demand and a keenness to recoup lost profits. In addition, waves of Chinese tourists are returning to Japan, Australia, Europe and the United States as border restrictions are lifted. Many Chinese CEOs are optimistic that 2023 will be a boomerang year for the economy.”
Still, they continue to see some of the country’s chronic problems stifling growth, such as the bursting of the housing bubble when residential home sales nationwide fell by over 30% in monetary value in the first half of 2022. “Construction backlogs, rising interest rates and weak project financing have left tens of millions of unfinished housing units,” they said.
A construction boom has been a key driver of the country’s feverish growth for years, which economists describe as a positive multiplier and acceleration effect. Conversely, stalled projects have triggered negative multiplier and acceleration effects along the supply chain in sectors such as home textiles, cement and ultimately on the economy and consumer confidence.
The decline in the real estate sector is being compounded by rising debt, China’s second chronic problem.
According to statistics from the Bank for International Settlements, China’s non-financial debt is US$51.87 trillion, or 295% of GDP, higher than Japan and the US.
Additionally, most of the debt is in the broader government sector. It is money that state-owned banks owe to State-Owned Enterprises (SOEs) and Town Village Enterprises (TVEs), meaning that one branch of government owes money to other branches of government. And that makes it difficult for Beijing and provincial and local governments to deal with haircuts, as the Greek government did a few years ago.
Then there is the collapse of the country’s population pyramid, the swelling in the number of people of retirement age and the thinning out of the working-age population.
“The working-age population in China peaked around 2015 and is projected to decline 13% through 2030 and continue through 2050,” Morrison and Black said. At that point, they said, “it would have dropped by more than 200 million workers, more than the combined working-age population of Germany, France, the United Kingdom, Italy, Belgium, the Netherlands and Switzerland!”
As Japan’s recent history attests, falling property values, rising debt and a shrinking working-age population are a dangerous cocktail for China’s economy.
In addition, these issues are changing the status quo for Beijing and its ability to guide economic growth. “In the past, the state believed that if it set the goals and ran the economy with a heavy hand, it would achieve its goals,” added Morrison and Black. “However, those days could be over.”