As of: February 10, 2024, 5:53 p.m
By: Christiane Kühl, Sven Hauberg
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Heads up!
China's economy is weakening, but there is reason for hope.
© N. Bruckmann/Dall-E (AI generated)
Weak growth, real estate crisis, declining birth rate: China's economy is starting the Year of the Dragon with its wings clipped.
But one sector gives hope.
Everything will be fine.
To put it simply, this is the message that China's astrologers are sending to the world for the Year of the Dragon, which begins this Saturday.
In Chinese mythology, the dragon represents luck, prosperity and wisdom; no other of the twelve Chinese zodiac signs is considered as auspicious.
China's Prime Minister also recently used the dragon symbolism.
All countries must create prosperity and peace together “with the power of a flying kite,” said Li Qiang at the World Economic Forum in Davos.
Li had come to the Swiss mountains to promote trust in his country and for investment in the Chinese economy.
"Choosing China's market is not a risk but an opportunity," Li said.
There is a good reason why the prime minister of the world's second-largest economy feels compelled to send advertising messages for his country to the world: In many places, trust in the Chinese economy has given way to deep-seated skepticism.
Buzzwords like “Peak China” are making the rounds, especially in the USA.
The tenor: China has passed its peak.
A look at the stock markets seems to confirm the pessimists.
The Hong Kong benchmark index Hang Seng is currently at values last seen in the years of the global financial crisis.
Things are looking similarly bad for the CSI 300, which brings together the most important companies on the stock exchanges in Shanghai and Shenzhen.
China’s economy is growing – but “national security” comes first
The problems facing China appear indeed enormous.
Youth unemployment is high, births are declining, and foreign direct investment is collapsing.
Private consumption is also weakening, and the travel time around Chinese New Year is only likely to change this in the short term.
And China's government?
She seems to want to wait out the problem.
At least that's what some observers are reading from the fact that there is still no date set for the all-important Third Plenum of the Central Committee of China's Communist Party, which observers have been waiting for since the fall.
This meeting, which takes place every five years, traditionally sets the course for economic policy for the next half decade.
In the past, these third plenums often initiated reforms that accelerated China's development.
China's private companies in particular could currently use such a liberalization impulse.
State and party leader Xi Jinping controls the economy more closely than his predecessors - because for him national security, social stability and securing the Communist Party's rule are his top priority.
For the time being, Xi has largely slowed down the opening up to a more market economy that has been progressing for decades.
“China is more willing than ever to accept weaker economic development in the long term,” says economist Wan-Hsin Liu from the Kiel Institute for the World Economy.
The fact that the plenary session has still not been convened is therefore not a good omen for China's economy in the Dragon Year.
Despite everything, China's economy grew by 5.2 percent in 2023, which corresponds to the growth target of "around five percent" set last March.
Growth will be “hard-fought” in 2023, said the head of the statistics office, Kang Yi, when presenting the data in January.
The economy is facing a complex external environment and will continue to face insufficient demand in 2024.
Economists at the World Bank expect growth of just 4.5 percent this year.
The International Monetary Fund predicts a downward trend in the coming years - to just 3.4 percent in 2028. Not enough for a country that still has to lift hundreds of millions of people out of poverty.
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China is struggling with high levels of debt
So far, China's economy has always demonstrated a certain degree of resilience, even in difficult times;
The collapse that was repeatedly predicted by foreign observers never occurred.
But in the past, Beijing has launched economic stimulus programs worth billions during every crisis and used the money to build infrastructure, from high-speed trains to coal-fired power plants.
But that's no longer so easy: there are now enough railway bridges and airports, and coal power is no longer very popular in view of the climate crisis.
It is unclear whether the dozens of new power plants approved as part of regional stimulus programs will actually all be built due to the trade-off between growth and climate protection.
And the money is no longer so easy.
The billion-dollar programs of the past have significantly increased China's traditionally low debt level: at the end of 2023, the government debt ratio (the ratio of government debt to gross domestic product) was at a record level of 55.9 percent, according to a report by the Chinese business magazine
Caixin
.
This would mean China is approaching the threshold of the Maastricht criteria, according to which the public debt of the euro members may not exceed 60 percent (which, of course, is not always met by them).
Beijing did not respond to the sluggish recovery after the corona pandemic with a bang, but rather with numerous smaller aid measures such as targeted interest rate cuts, financial injections and tax incentives for certain sectors.
However, these measures have not yet been enough.
Given the turbulence at the major real estate developers in China, people are unsettled.
They keep their money together instead of spending it on consumer goods or purchases like a car.
Added to this is the high level of youth unemployment, which was over 20 percent last summer and has only fallen slightly since then.
Under these circumstances, it is difficult to stimulate consumption, which is actually the central element of China's growth strategy.
China's real estate sector is on the verge of collapse
The turmoil in the real estate sector is the single most important factor behind the difficult situation.
Several of the largest housing construction groups have gotten into difficulties due to their exorbitant debts.
At the end of January, a court at the Hong Kong stock exchange sealed the end of the problem company Evergrande, which was in debt with a whopping $300 billion.
It is completely unclear what will become of the company's many half-finished residential projects.
Most buyers in China pay for an apartment before it is even built.
The current crisis is destroying the dream of owning a home or destroying middle class investments.
Some cities therefore lowered mortgage interest rates or the minimum requirements for purchasing a home.
Despite these efforts, there is little sign of recovery.
It is also of enormous importance for foreign companies whether the market for consumer goods will finally pick up or not.
According to the recently presented business climate index by the German Chamber of Commerce (AHK) in China, 83 percent of those surveyed see the Chinese economy currently in a downward trend.
But almost two thirds of them believe that the economic weakness will only last for one to three years.
“The market may grow more slowly and there could be more bumps in the road in the future,” said AHK CEO Ulf Reinhardt.
“But China is such a large market that even modest growth matters because of its sheer size.”
At the same time, many Western companies – keyword “de-risking” – are also looking for new locations, for example in India or Vietnam.
This can be seen, for example, in foreign direct investment (FDI) in the Chinese market, which fell by eight percent to 1.13 trillion yuan (146 billion euros) in 2023.
China is investing billions in renewable energy
But it's not all sad.
Billions are flowing into energy transformation, especially the expansion of renewable energies.
This has created a completely new economic sector, with many companies and jobs producing solar panels, electric vehicles and batteries.
Investments in clean energies rose by 40 percent to 6.3 billion yuan (820 billion euros) in 2023, according to Lauri Myllyvirta, China expert from the Center for Research on Energy and Clean Air in Helsinki.
The entire investment growth of the Chinese economy in 2023 will come from this sector alone, which Myllyvirta also includes nuclear power, power grids, energy storage and railways.
“These clean energy sectors were therefore the largest driver of China’s overall economic growth in 2023, contributing 40 percent of economic growth,” writes Myllyvirta.
And this sector will continue to grow because the People's Republic is also working on the energy transition.
Good news – for China and the global climate.