Business Matters | Is China’s economy in the doldrums?

The real estate sector has dipped, and the country’s increasing ageing population isn’t helping matters either

February 14, 2024 10:09 pm | Updated 10:09 pm IST

A recent Bloomberg article had a headline that caught my eye: Wall Street Snubs China for India in a Historic Markets Shift.

Often, but not always, stock market movements are indicative of what is happening in an economy. In today’s episode, let’s see what has been happening in China on various economic fronts. 

Chinese stock market indices have fallen given concerns around the economy. Japanese newspaper Nikkei reported that on February 5, the Shanghai Composite Index touched its lowest close in four years. In the week ended February 2, the index fell 6.2% in its biggest weekly loss since October 2018. 

China’s biggest real estate developer, Evergrande, which was in the news recently for having too little funds to pay too much debt, went into insolvency a fortnight ago. In a sector that accounts for about 20% of the world’s second-largest economy, such a large entity going into insolvency sounds alarming. 

But it does look like the bad news has been on the horizon and has finally hit the industry. The IMF notes in a recent blog that the reliance on real estate for economic growth has been accompanied by the buildup of significant risks. 

The Fund says that home prices became significantly stretched relative to household incomes in the decade before the pandemic, in part because consumers preferred to invest their considerable savings in real estate given the scarcity of attractive alternative savings options. 

CNN estimates that more than 2/3rds of household savings are tied to the real estate sector. Why so? Expectations of continued increases in home and land prices allowed property developers to borrow rapidly, with land sales providing crucial revenue for local governments, according to the IMF. 

However, recognising the bubble and needing to step in the Chinese government moved in 2020 to make it harder for developers to borrow. Since then, many of them have fallen into insolvency, unable to pay debts. News of insolvency of the sector’s poster-child, Evergrande, has rattled industry. 

One consequence of the government clamp-down is that house sales have fallen amid homebuyer concerns that developers lack sufficient financing to complete projects and that prices will decline in the future. 

What will exacerbate housing sector woes is that the coming years demand will eventually dip. One reason is that the country will see fewer younger folk seeking new housing. 

And why is that? Not only because of poor buyer confidence but also because China’s population is ageing. Going forward, there would be fewer and fewer young people with a lot of years of productivity left in their working lives to seek new housing. 

WHO estimates that by 2019, there were 254 million older people aged 60 and over, and 176 million older people aged 65 and over. By 2040, an estimated 402 million people (28% of the total population) will be over the age of 60. 

Also, the country’s total population is dipping. In 2023, the count dipped for the second year in succession and this time by about 2 million. 

An ageing population is always a problem for a country’s government? Why? You have fewer people to add to economic productivity and increasingly more senior citizens to take care of with higher expenses in the form of healthcare expenditure, pensions, and the like. 

On another economic front, China’s debt burden too has increased. 

Nikkei Asia recently reported that China’s debt-to-GDP ratio climbed to a new record high in 2023 despite a slower pace of borrowing, reflecting the economy’s weakening growth. It touched about 287% of GDP.

Compare this with India, where the ratio was about 81% as of March 2023.

Now, let’s come to actual economic growth. The IMF estimates that China would have grown about 5% in 2023. On such a large base, 5% growth is not something to belittle or scoff at. 

What is important, and making global investors jittery, is the potentially slowing rates of growth. 

The Fund estimates that 2024 would see China grow 4.6% and that there would be a gradual decline. It estimates 2028 growth at 3.5% for China. 

Ironically, just at a time when a country would want its businesses to thrive, both domestic and foreign companies have come under the lens of Chinese authorities. Regulatory actions have coincided with the timing of other economic woes that we have just been over. 

Billionaire Jack Ma, founder of Alibaba – or China’s Amazon equivalent – had gone off the public eye for a while and when he did resurface, has been far more subdued. Media reports point out that in his earlier avatar as a successful business magnate, he had made comments about China’s financial system that likely didn’t go down well with the authorities. By 2020, the government had intensified scrutiny of his businesses.

The latest news is that he has busied himself with educational projects and has invested in a firm that sells farm products. 

China has also filed a lawsuit against one its largest businesses Tencent for violating laws that protect minors. The authorities have also come down heavily on the video gaming sector in which Tencent is an entrenched player.

In its geopolitical fight with the US, China has also shown hints of aggression against US companies operating on its soil. For example, Chinese government offices do not allow a Tesla car to be driven into their premises on security fears. The cars tend to collect data on their surroundings and this has triggered the action.

In the middle of last year, the US flagged concerns around American firms in China struggling with aids by authorities, slow deal approvals, the use of anti-espionage law to make life difficult for these companies.

As a consequence of its geopolitical tiff with the US, the North American nation has been urging its companies to find alternative supply chains. Recently, Mexico replaced China as the country from which the US imports the most. Ideally, India would have like to have taken that place. But our country not only does not have the geographical proximity to the US that Mexico but it also has to contend with Vietnam and the Philippines as competitors. 

Finally, we come to deflation - a word that is anathema to any country that wants healthy economic growth. China saw the greatest drop in consumer prices in over 14 years in January. Its consumer prices decreased by 0.8% year over year, which was the longest decline since October 2009. This was the fourth consecutive month of declines. Consolingly, the consumer price index rose 0.3% on a monthly basis, marking the second consecutive month of growth. 

So net-net, to answer the question in the title to this video, is the Chinese economy in the doldrums? Likely not. This is the second-largest economy in the world. Its population is still significant. Its people will still have to buy food, buy electronic gadgets, its children will still have to go to school... so consumer demand will eventually revv up, experts say. But do challenges exist in the near term? They sure do.

Script and presentation: K. Bharat Kumar

Production: Shibu Narayan

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