China, known for its rapid development and economic growth, is now facing significant risks that can impact its households and the global economy. Recent developments have exacerbated these risks, including a substantial slowdown in China’s economy, a decline in exports and imports, and falling prices across various goods. Additionally, a major real estate developer, Country Garden, missed bond payments and estimated significant losses. These events have caused trouble for Chinese workers and households and signaled a shrinking demand for goods globally. China’s economic slowdown has far-reaching implications as it is the largest consumer of commodities in the world, which will have a significant impact on the global economic outlook.
China has been a major driver of global economic growth over the past decade, accounting for over 40% of total growth. However, the country’s mounting debts, estimated at 282% of national output, limit its ability to stimulate the economy. The government has introduced spending programs to encourage consumer spending and business investment, but the details have been unclear, raising concerns about local governments being burdened with the debt. Local governments have borrowed heavily in the past to fund infrastructure projects, and this poses a significant risk to China’s economy.
Furthermore, China’s economic model is shifting from state-directed investments in infrastructure and exports to one led by domestic consumer spending. The previous model has served China well for two decades, but private entrepreneurs have been constrained in recent years due to regulatory crackdowns. Conflicts over trade have also emerged, particularly with the United States, as China’s export growth and loss of domestic factory jobs have caused tensions. The US has implemented tariffs on Chinese imports, and the Biden administration has added restrictions on investment in key Chinese sectors.
The COVID-19 pandemic has disrupted China’s plans to transition to an economy centered on domestic spending. The government imposed strict lockdown measures, which were later lifted in December. However, consumer spending has remained weak, and data highlighting the economy’s problems has been halted by the National Bureau of Statistics. Chinese households, known for their high savings rates, have increased their savings, reflecting a decline in public faith. Real estate, which has been overinvested in, has experienced price drops, leading to halted construction projects and empty apartment blocks.
The fear of deflation, a decline in prices that discourages spending, is a concern for China. Deflation can lead to a decline in economic activity and harm society as a whole. While most economists believe China will avoid deflation, the government’s response to stimulate the economy may exacerbate existing threats and create new debts. The government is aiming to boost domestic demand and transition to slower growth by focusing on the services sector. However, challenges such as the shift of factory work away from China and the potential loss of faith from the public may bring about volatility and turbulence.
In conclusion, China’s economic risks are posing challenges for its households and the global economy. The recent slowdown in China’s economy, decline in exports and imports, falling prices, and distress in the housing market have all contributed to these risks. The government’s limited options to stimulate the economy due to mounting debts further exacerbates concerns. While China aims to transition to an economy driven by domestic consumer spending, challenges such as declining wages and household wealth and the loss of public faith may hinder this transition. The outcome of China’s economic situation will have far-reaching implications for both China and the global economy.