Global Mood Sours on China’s Economy
Investors and the Chinese public alike are losing faith in Beijing’s ability to stave off a serious downturn.
Welcome to Foreign Policy’s China Brief.
Welcome to Foreign Policy’s China Brief.
The highlights this week: Global concern about China’s economy grows amid alarming data, Chinese President Xi Jinping flies to South Africa but skips his scheduled speech at the annual BRICS summit, and the economic downturn hits Chinese homeowners and workers hard.
China’s Economy Rings Alarm Bells
As one piece of bad news after another breaks, concerns about the state of the Chinese economy have deepened swiftly in recent weeks—not helped by the central government’s clumsy efforts to conceal data. Data from last month paints a grim picture from retail sales to exports. In August, a major real estate developer and a large financial management firm have missed debt payments, and China’s central bank has cut a key interest rate.
It’s unlikely that China will face a so-called Lehman moment, with the implosion of a major firm triggering a potential catastrophe for the whole system. The central government simply won’t allow that kind of collapse, and the bailout is now a well-established policy tool. Plus, the economic problems becoming apparent now—from a collapsing real estate sector to a debt crisis of unknown extent that spans local government—aren’t new; they have bubbled under the surface for years.
What is new is investors’ faltering faith in the Chinese government’s ability to nullify or stave off a serious economic downturn—and the surge in deflation that would come with it. For years, many economists’ belief in the so-called China miracle of perpetual growth, combined with the sheer scale and opaque nature of the Chinese economy, led to a misplaced confidence in the Chinese political leadership. That confidence has now faded.
Global investors and analysts no longer see this year’s slowdown as a painful hiccup caused by a weak recovery from the COVID-19 pandemic, but rather as a potential start to China’s lost decade. The Chinese public seems to have the same fears, which stem from a wider collapse of trust in the government caused by both Chinese President Xi Jinping’s growing autocracy (including the abolition of term limits in 2018) and by the botched handling of China’s COVID policy last year.
Amid these economic woes, Xi has been largely absent from public view, presumably tucked away at the Beidaihe retreat of the Chinese Communist Party (CCP). To add to the concerns, he flew to South Africa to attend the annual BRICS summit—the first held in person since 2019—and then sent a substitute to give his speech on Tuesday after attending a lunch with South African leadership. It’s possible that there are some leadership shenanigans going on behind the scenes, but it’s also likely that Xi is just sick—something Chinese leaders never admit.
Concerns about China’s economy have produced a slew of pieces about the economic crisis this week. Beyond Foreign Policy’s own coverage, some of the best takes include Adam Posen’s analysis of what it means for U.S. geopolitics, Li Yuan’s close read of the Chinese business mood, Noah Smith’s structural explanation of the crisis, and Lingling Wei and Stella Yifan Xie’s analysis of a now broken model of economic growth.
However, one relatively under-covered factor in the shift in mood is the Chinese government’s recent crackdown on the health care industry. Following signals from central leadership, multiple provinces have embarked on anti-corruption campaigns in the sector, targeted at hospital managers, as well as ties between doctors and private providers and the pharmaceutical industry. For some investors, this seems to be the straw that broke the camel’s back. On Aug. 7 alone, news of the crackdown wiped $27.4 billion in value off A-list health care stocks.
That came as a particular shock; there had been cautious if misplaced optimism among investors that the round of regulatory crackdowns that began in 2020 and wiped $1.1 trillion in value off China’s technology sector alone was over. China’s leaders, economists argued, knew they had to concentrate on growth, not politics. This well-meaning idea was unfortunately lacking in any evidence from Chinese government action or rhetoric as the state has continued to emphasize ideological security and party control. The health care crackdown also hurt because health care was sold for years as a major opportunity for foreign investment.
And yet, China’s health care sector is corrupt and in need of change. Although its health insurance system has improved, most of the costs are still borne by patients. The majority of Chinese hospitals are public, but they are profit-driven entities within a state-controlled system. Apart from a period during the pandemic when they were heralded as heroes, doctors are unpopular and even mistrusted in China. Most aren’t trained to global standards, and even a senior doctor makes less than $15,000 a year on average, money usually supplemented by kickbacks.
The health care campaign reflects the dilemma for the government now: Numerous sectors need reform, but it needs to be careful and systematic. In the current political climate, heavy-handed crackdowns are the norm. There may be a way for China to feel its way out of economic crisis, but it will take skills and flexibility that Xi’s administration almost certainly lacks.
What We’re Following
Is BRICS a bloc? Xi’s skipped speech at the BRICS summit in Johannesburg, South Africa, this week has startled observers, especially given that China had put considerable weight on the event. It’s also not clear if the Chinese leader’s expected meeting with Indian Prime Minister Narendra Modi on the sidelines will go ahead. BRICS is an odd group, with a name literally coined by Goldman Sachs jargon. China found the idea convenient, since it suggested a unity among the non-Western world—but in practice, that doesn’t appear to be the case.
Consider the other members’ relationships with China. Russia is all but a formal ally; China has propped up Russia’s economy and likely supplied it with useful tech amid the war in Ukraine. South Africa has long-running ideological ties to the CCP, which supported the ruling African National Congress party in the freedom struggle. India sees China as a threat and regularly clashes with it along their disputed border; Brazil swings depending on who is in power there. Little of this offers a stable foundation for a global bloc.
Camp David summit. U.S. President Joe Biden brought the leaders of Japan and South Korea together for a significant summit between two countries that have rarely gotten along throughout history. Japan brutally occupied South Korea for decades, and Seoul holds a grudge over issues such as Tokyo’s refusal to compensate so-called comfort women or to fully apologize for colonial atrocities. South Korea imposed a rigid ban on Japanese cultural products, including films and music, until the late 1990s, and several such bans still exist.
But in a historical shift, China is now less popular than Japan in South Korea, thanks to Beijing’s support of Pyongyang and the impact of pollution from Chinese factories in South Korea. This, plus the arrival of a more conservative South Korean administration, has pushed Tokyo and Seoul closer together—with some help from Washington. Deals between the countries are aimed at countering North Korea as well as China; Beijing has reacted with predictable complaints.
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Tech and Business
The fate of Chinese homeowners. At the heart of China’s economic crisis is the bloated real estate sector, estimated to make up as much as 30 percent of the country’s GDP, compared to about 17 percent in the United States. The urban upper-middle class, the bedrock of CCP support, is massively invested in property—sometimes because they are longtime residents of the metropolises where government-owned property was transferred to private hands from the old danwei housing system in the 1990s. That property has since shot up in value.
Often, these upper-middle-class property owners are people who moved to China’s big cities as they grew and bought property there with loans from extended family. The assumption was that property values would keep soaring, and people built their financial futures accordingly. That’s why the government is so reluctant to let housing prices fall; they have probably dropped by more than official figures admit, but local governments have forbidden real estate firms from lowering prices too much.
Admitting a serious drop in value could cause a wider crisis of confidence among these property owners, even if they weren’t actively trying to sell their homes. But the problem is that with prices artificially fixed at high values, inventory isn’t moving, leaving developments empty. Residential sales dropped by 43 percent in July, deepening the hole of local government finances, which are dependent on land sales to real estate companies.
The fate of young workers. Worried as homeowners might be, the impact of the economic slowdown on the poor or the young could be much worse. Youth unemployment figures have reached 21.3 percent but could be much higher; the government has now stopped publishing the data altogether. Accounts from young graduates tell a sad story, with many resorting to factory jobs.
Still, more than 40 percent of Chinese youth don’t go on to tertiary education. The real estate sector has long depended on migrant labor from the countryside, and the drop in new construction has cost jobs. These migrant workers are moving to the service sector rather than into manufacturing, leaving a paradoxical labor crunch—usually where graduates don’t want to live. Salaries seem to have dropped since the pandemic, with many migrants complaining they can’t find a living wage in once-prosperous areas.
James Palmer is a deputy editor at Foreign Policy. Twitter: @BeijingPalmer
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