China’s Economy Is Facing Its Biggest Challenge In Decades

Authored by Terri Wu via The Epoch Times (emphasis ours),

China’s economy is facing its biggest challenge in decades, and the authorities are running out of tools in their toolbox to address the issues, according to experts.

The country’s latest macroeconomic data point to an economy on the verge of deflation.

The June consumer price index was flat year on year and down by 0.2 percent compared with May. The producer price index, which reflects wholesale costs, declined by 5.4 percent compared to June 2022, showing a bigger drop than May’s 4.6 percent.

June’s trade data continued to show a downward trend. The dollar value of China’s exports decreased by over 12 percent year on year, a bigger drop than May’s 7.5 percent. Its imports also declined by nearly 7 percent from June 2022, compared to 4.5 percent in May.

Gary Jefferson, an economics professor at Brandeis University and a specialist in the Chinese economy, said the troubles facing the world’s second-largest economy are multifaceted, including heavy debts in the property sector and local governments, the weakening of return to investments, low household confidence, and geopolitical tensions with the United States and the European Union.

And it’s the result of the regime’s policies over the past 30 to 40 years, he said.

While many have pointed to the massive disruptions brought about by the pandemic and the regime’s zero-COVID policies as the source of China’s current woes, Mr. Jefferson believes that structural issues are likely to blame.

“As evidence of the systematic nature of the problem, it appears that the decline in economic confidence and social confidence are mutually reinforcing,” Mr. Jefferson told The Epoch Times.

“The reluctance to partner and marry and have children likely results in part from and feeds into the economic downturn. Fewer families augur a decline in the demand for larger or upscaled housing units, further contributing to weakness in the property sector, leading to less demand for land leases and local government revenue.”

China is grappling with a declining birth rate despite the regime’s dropping its one-child policy in 2016, and allowing families to have up to three children in recent years. Many couples have refused to have more kids citing the high costs involved.

‘Deepest Difficulty’ Since 1989

“The government is really in sort of the deepest difficulty it’s been in, at least since 1989, June 4th,” he added, referring to the Tiananmen Square massacre of Chinese students seeking democratic reforms and the resulting international isolation. After that, China’s economic growth took three years to get back on track.

While a southern tour by then-Chinese communist leader Deng Xiaoping in 1992 helped reignite economic growth, China is now not in the same situation having significantly developed since then, Mr. Jefferson pointed out.

With decades of savings by Chinese families and enterprises and abundant investment opportunities, economic recovery is not likely to readily happen, he said, adding that authorities are running out of tools in their toolbox to fix the economy.

In response to the 2008 global financial crisis, Chinese authorities released an enormous stimulus package— 4 trillion yuan ($586 billion at the time)—that significantly increased government spending on infrastructure, and debt in the property sector and local government.

Today, the return on physical and human capital investment is low compared to 10 years ago due to the enormous volume of infrastructure investment already undertaken, and the increase in higher education enrollment the Chinese Communist Party (CCP) initiated in 1999, said Mr. Jefferson. China’s youth unemployment rate was over 20 percent in May and June, partly due to the oversupply of college graduates that grew from 1 million to 10 million in two decades.

In his view, a stimulus would require enormous funding from the central and local governments, which would mean even more debt accumulation—and that’s very problematic. And when people have more money, they may choose to bank it or use it to pay off their debts. Therefore, getting more money into people’s hands may not stimulate spending, he added.

The professor gave an analogy of a car speeding along a hill and suddenly facing a cliff. “Often when this happened, there’s been a cliff maybe 50 or 100 feet away that the car could land upon and then resume its journey,” he said.

But in the current circumstances, “more than any other situation in the last 40 years, the distance to the other side of the cliff is substantially greater than that has been, making a safe landing more problematic.”

A key distinction between China and Western economies, according to Mr. Jefferson, is that Western governments have procedural legitimacy from elections and legislative processes, but the Chinese Communist Party’s (CCP) legitimacy depends entirely on its economic performance. Because of this, “it makes it very, very difficult for the Party to be able to manage a recession or accept a recession,” he added.

“It’s a rather difficult, embarrassing situation for the leadership.”

‘I Don’t See Hope Now’

Mike, 27, works at a polymer additives factory in a city in eastern China’s Zhejiang Province, one of the country’s private sector hubs. Mike spoke to The Epoch Times using an alias for fear of CCP reprisals.

He graduated from college in 2017 with a major in urban underground space engineering. In July 2020, after his two-year contract with a subway project in southern China’s Hunan Province ended, he moved to his current city to join the factory that had just opened. The factory specializes in higher quality products tailored to the overseas market.

In May 2022, a big Western European company didn’t renew its annual order of 15,000 pounds of products due to the geopolitical tensions between China and Europe, he said. Since then, the factory hasn’t been able to secure any replacement orders to make up for this shortfall. It has now stopped production and is selling its inventories.

The business, he said, is looking for ways to adjust the product line to cater to the domestic market, but “securing orders will be very difficult” because demand is low.

Mike’s small factory wasn’t alone. According to him, a nearby auto parts factory has cut 3,000 workers or 30 percent of its workforce. In addition, he said workers at that factory no longer have overtime opportunities, a main source for them to earn above the minimum line to make ends meet.

When Mike first moved to Zhejiang, he thought his life was going somewhere. So he bought an apartment in the city in October 2020. However, the economy took a downturn and the three-year pandemic lockdowns exhausted many, he said.

“I don’t see hope now,” he told The Epoch Times. “Everyone is dealing with much stress in life.”

As a factory supervisor, Mike makes about 9,000 yuan a month, or $1,260. His mortgage is 6,000 yuan, or two-thirds of his monthly income. After paying for all necessities, he could hardly save anything, he said. And he still needs to save for a car. Even though his girlfriend, unlike many Chinese women, doesn’t require Mike to have a car and an apartment to marry, he considers it “a man’s obligation” to achieve those before marriage.

Mike’s hope is to have some savings to take care of his parents, at least to cover their medical expenses when they get older. He wants a child but would rather wait until he’s financially able to provide the baby with a good life. As to having more than one child now that the one-child policy has ended, Mike said “no” without hesitation. “I wouldn’t be able to afford that!”

When asked about Chinese state media reports that the economy has been steadily recovering, Mike replied, “That’s propaganda! It’s exactly the opposite of how we feel among the people.”

“As far as my life goes, I’m in a recession,” he added.

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