Drop Off

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By Nick MarshAsia business correspondent

The Past six months has brought a stream of Bad News for China's economy: slow growth, record Youth Unemployment , low foreign investment, weak exports and currency, and a property sector in crisis.

US President Joe Biden described The World 's second-largest economy as " a ticking time bomb" predicting growing discontent in the country.

China's leader Xi Jinping hit back, defending the " strong resilience, tremendous potential and great vitality" of the economy.

So who is right - Mr Biden or Mr Xi? As Is often the case, The Answer probably lies somewhere In Between .

While the economy is unlikely to implode any time soon, China faces huge, deep-rooted challenges.

A property crisis and poorer households

Central to China's economic problems is its property market. Until recently, Real Estate accounted for a third of its entire wealth.

" This made no sense. No sense at All , " says Antonio Fatas , professor of economics at the Business School INSEAD in Singapore.

For two decades, the sector boomed as developers rode a wave of privatisation. But crisis struck in 2020. A global pandemic and a shrinking population At Home are not good ingredients for a programme of relentless housebuilding.

The government, fearing a US-style 2008 meltdown, then put limits on how much developers could borrow. Soon they owed billions they could not pay back.

Now demand for houses has slumped and property prices have plunged. This has made Chinese homeowners - emerging from three years of tough coronavirus restrictions - poorer.

" In China, property is effectively your savings, " says Alicia Garcia-Herrero, chief Asia economist at wealth management firm Natixis. " Until recently, it seemed better than putting Your Money into the crazy stock market or a bank account with low interest rates"

It means that, unlike in Western countries, there has been no post-pandemic spending boom or major economic Bounce Back .

" There was this notion that Chinese people would spend Like Crazy after zero-Covid, " Ms Garcia-Herrero says. " They'd travel, go to Paris, buy the Eiffel Tower . But actually they knew their savings were getting hammered by The Fall In House prices, so they've decided to keep hold of what cash they have. "

According to some economists, it will take years for this property pain to subside.

A flawed economic model

The property crisis also highlights problems in The Way China's economy functions.

The country's astonishing growth in The Past 30 years was propelled by building: everything from roads, bridges and train lines to factories, airports and houses.

However, some economists argue this approach is starting to run out of road, figuratively and literally.

One of the more bizarre examples of China's addiction to building can be found in Yunan province, near The Border with Myanmar. This year, officials there bafflingly confirmed they would go ahead with plans to build a new multi-million dollar Covid-19 quarantine facility.

The Bottom Line is that there is only so much China can build before it starts becoming a waste of money. The country needs to find another way of generating prosperity for its people.

" We're at an inflection point, " Professor Fatas says. " The old model is not working, but in order to change focus you need serious structural and institutional reforms. "

For example, he argues, if China wanted a financial sector to fire up its economy and rival the US or Europe, the government would first need to loosen regulation considerably, ceding large amounts of power to private interests.

In reality, The Opposite has happened. The Chinese government has tightened its grip on the finance sector, scolded " westernised" bankers for their hedonism and cracked down on big Technology firms like Alibaba.

One Way this has been reflected is in Youth Unemployment . Across China , millions of well-educated graduates are struggling to find decent white-collar jobs in urban areas.

In July , figures showed a record 21. 3% of jobseekers between the ages of 16 and 25 were out of work. The Following month, officials announced they would stop publishing the figures.

According to Professor Fatas, it is testament to a " rigid, centralised economy" struggling to absorb such a high number of people into the labour force.

A top-down system is effective when you want to build a new bridge, but looks cumbersome when The Bridge has already been built and people are still looking for work.

What will the government do now?

A change of economic direction requires a change of political ideology. Judging by the Chinese Communist Party's (CCP) tightening grip On Life recently and President Xi's tightening grip on the CCP, this doesn't look likely. The Leadership might argue it is not even necessary.

In some ways, China is a victim of its own success. The current rate of growth is only considered " slow" when you compare it with the staggeringly high numbers of previous years.

Since 1989, China has averaged a growth rate of around 9% per year. In 2023, that figure is predicted to be around 4. 5%.

It is a Big Drop off, but still much higher than the economies of the US, the UK and most European countries. Some have argued that this suits China's leadership just fine.

Western economies tend to be powered by people spending, but Beijing is wary of this consumerist model. Not only is it deemed wasteful, it is also individualistic.

Empowering consumers to buy a new TV, subscribe to streaming services or go On Holiday may help stimulate the economy, but it does little for China's National Security or its competition with the US.

Essentially, Mr Xi wants growth, but not for the sake of it. This may be behind the recent boom in cutting-edge industries, such as semiconductors, Artificial Intelligence and green Technology - All of which keep China globally competitive and make it less reliant on others.

This idea might also explain the government's limited response to the Faltering Economy . So Far it has only tweaked around the edges - easing borrowing limits or shaving a fraction off interest rates - rather than pumping in large amounts of money.

Foreign investors in China are worried and want the government to take action quickly, but those in charge seem to be playing the long game.

They know that, on paper, China still has massive potential for more growth. It may be an economic powerhouse, but average annual income is still only $12,850. Almost 40% of people Still Live in rural areas.

So on The One hand, not being tied to election cycles has allowed and will allow China the luxury of taking such a long-term view.

But on The Other , many economists argue that an authoritarian political system is not compatible with the kind of flexible, open economy needed for living standards matching those in officially " high-income" countries.

There could be a danger that Mr Xi is prioritising ideology over effective governance, or control over pragmatism.

For Most People , this is fine when the economy is doing well. But as China comes out of three years of zero-Covid, with many struggling to find a job and family homes plunging in value, it is a different story.

This takes us back to Mr Biden's " ticking time bomb" description, which suggests civil unrest or, even more seriously, some kind of dangerous foreign policy action in response to it.

At The Moment , though, that is pure speculation. China has emerged from any number of crises in The Past . But there is No Doubt that the country's leadership is now facing a unique set of challenges.

" Are they worried about the current situation? Of course, they see the numbers, " Professor Fatas says.

" Do they understand what needs to be done? I'm not sure. My guess is they're missing certain things that are fundamental for The Future of China. "

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Source of news: bbc.com