The State of the Chinese Economy

Ryan Heshmati

August 18, 2023

The Chinese economy is in concerning shape. Once considered destined to overtake the United States economy, China’s economic prospects look to have deteriorated. Reuters quotes Desmond Lachman of the American Enterprise Institute, who expects economic growth to falter to around 3%, which he argues will have the feel of a recession. The country is facing various challenges, from a real estate crisis to youth unemployment; Chinese leadership has an incredibly sensitive situation on its hands. 

Currently, deflation is rocking the economy, with the consumer price index down 0.3% from last year, according to BBC News Singapore, which notes a detrimental impact on attempts to address debt as a result. Further, trade data has been quite discouraging, with both imports and exports seeing double-digit decreases in July from a year prior. 

Beyond that, China is suffering from extreme levels of youth unemployment, with a July piece from Reuters titled “Will China Ever Get Rich? A New Era of Slower Growth Dawns,” reporting a rate above 20%. Earlier this month, however, the government decided to halt the publishing of that data. 

Since 2021, China has been facing a poor real estate environment after government attempts to address exorbitant borrowing. Homebuilder Evergrande group defaulted on debt payments, leaving many would-be homebuyers in turmoil as the builder who took their “pre-sale” payments experienced serious financial challenges. This week, Evergrande Group filed for Chapter 15 bankruptcy protection; according to CNBC, they lost over $81 billion in the last two years.

With so many challenges facing the Chinese economy today, many are drawing parallels to Japan after it saw its period of supercharged growth end in the 1990s. Japan experienced what is now known as “the lost decade,” where stagnation filled the period, starkly contrasting the growth that had invigorated its economy not so many years before. It may not seem so terrible for a slower period to follow a strong period of rapid growth, but China and Japan’s circumstances are less aligned than appears at first glance, according to the aforementioned Reuters piece. The authors point out, “When Japan began to stagnate in the 1990s, it had already exceeded the average GDP per capita of high-income economies and was nearing U.S. levels. China, however, is only just above the middle-income point.” 

With deflation, significant youth unemployment, and a real estate crisis, the coming quarters will be essential in gaining an understanding of where the superpower will see its economy go next. Connections to Japan’s lost decade are especially concerning as China’s GDP per capita is nowhere near where Japan’s was when it began to experience stagnation. Ultimately, however, whether or not China will be able to navigate its way through this environment is a question only time can answer.