China’s Economy in Decline as the World Looks for Secure Alternatives

Supply chain nightmares and soaring prices expected

Over the last three decades, China has ridden a wave of growth that expanded its manufacturing capacity, consumption appetite and global economic influence. The Chinese Communist Party (CCP) was laser-focused on economic development, leading to severe mistakes like the property market bubble and heavy debt burdens. Inebriated with the notion that Beijing always knows best, this relentless pursuit of wealth kept China charging forward without pause or wise reflection.

This era not only boosted Beijing’s objectives but also fueled global demand. China’s hunger for modernization and industrial prowess drove many countries’ development strategies. Even many American companies banked on China’s potential as a critical market; however, those bets have not paid off.

Xi Jinping shifted the CCP’s focus from economic growth to national security. Wealth ceased being the top priority; it is now power. This shift has reshaped both China’s priorities and its international interactions. Unlike before, hefty stimulus packages will not be the norm, and the explosive growth predictions for China’s economy are unlikely to materialize. Beijing’s global stance now leans more towards political power than economic pragmatism. As Xi shifts focus from the economy, a new chapter centers on cutting-edge technology and military strength.

American businesses must now ponder how Beijing’s decisions will upend the status quo. The free world must now prepare for reduced demand and precarious supply chains from farmers to pharmaceuticals. Policymakers face a more obstinate China in conflicts while the world grows more circumspect of the monster it helped create.

The Chinese economy has struggled with deep-rooted issues for a decade. The hubris of Xi’s post-COVID policies encountered a harsh reality, and China’s growth model is now broken. Initially hopeful of a swift recovery, it now lags behind the free world.

China’s artificial real estate sector has not only shaped Chinese wealth but also funded local governments. Unlike American property taxes, land sales in China sustain social services. While big cities like Shanghai prosper, the real action is in third-tier cities, home to China’s bizarre ghost towns.

The real estate market has long been on shaky ground. With housing exceeding the population caused by irrational estimates, grand projects remain empty. In Shenyang, some large projects sat idle and have now been repurposed for housing cattle. Despite attempts to curb the bubble, Beijing’s reliance on real estate as a financial crutch unwisely kept construction booming. The fear of a sector collapse forced China to feed its credit addiction, avoiding a financial catastrophe.

With the real estate sector steeped in government-fueled speculation and mounting debt, it is now facing turbulent times. Country Garden, China’s largest real estate developer, teeters on the edge of collapse, signaling Beijing’s waning patience with the unsustainable practices. Provinces grappling with financial strain are seeking bailouts and liquidating assets, thus exacerbating the crisis. The shadow banking sector, a linchpin of the real estate boom, is also under immense pressure with reports of missed payments and protests from investors.

The landscape has shifted dramatically, with developers defaulting and prospective buyers hesitating to make advance payments for properties that will likely be worth a fraction by the time they are closed on. The once frenzied rush to invest, driven by soaring prices, has given way to a cautious retreat.

While official figures downplay declining prices, independent data reveals significant decreases in major cities like Shenzhen and Shanghai. Tier-two and tier-three cities have witnessed even steeper price falls, with some areas experiencing a 50 percent drop in real estate value. The market dynamics in these regions, plagued by deep-rooted issues, pose a systemic threat to the overall market stability.

Beyond the real estate turmoil, China grapples with broader economic challenges. Amid a global inflation battle, China remains mired in overwhelming deflationary pressures as domestic demand struggles to pick up. Export figures, pivotal to the country’s GDP growth, have plunged to multi-year lows, highlighting the external economic woes. While recent data shows a slight uptick in exports, the overall trend remains alarming, underscoring the multifaceted strains on China’s economic landscape.

Anticipating a slowdown of 8 percent in China’s exports compared to last year, trading partners are anticipating more profound shifts in supply chains due to trade tensions with Europe and the U.S., thus impacting multinational corporations’ investment plans. This shift could lead to a self-reinforcing cycle affecting investment and consumer behavior.

The challenge for the CCP resembles a game of Whac-A-Mole, strategically addressing financial upheaval to prevent social unrest. With optimistic growth projections lowered to 4.6 percent for 2024, China’s economy faces challenges that contrast sharply with previous double-digit growth demands. The situation in China resembles a complex game where correction is elusive, deleveraging is stalled and challenges persist; resulting in a no-win situation.

Beijing is facing a challenging dilemma as its economy struggles to keep up. The CCP is juggling numerous tasks with limited resources, from addressing a property-market correction to supporting local governments and establishing a safety net for the people amidst Beijing’s instability. However, all these endeavors come at a cost, financially and politically. The fear of losing control looms large, especially with potential disruptions like falling property values and reduced exports.

The pressure on Beijing is further compounded by the need to address future concerns, such as China’s shifting demographics. Mandates like the one-child policy have fast-tracked the country’s aging population creating a demographic nightmare. The strain on the social safety net is evident, with a growing number of retirees and a dwindling workforce to support it.

While China’s GDP per capita stands at around $12,800, the specter of following Japan’s path of economic struggle looms. China is now suffering the unintended consequences of its own making as it ages before it prospers.

China never implemented a safety net for its people as it rose in relative prosperity, leaving them feeling financially insecure about unexpected expenses like an economic downturn, inflation, healthcare and education. Without significant changes, China’s economic future risks evolving from a flash in a pan success story to a lethargic entity.

Recent reports of a modest stimulus package aimed at meeting minimal growth targets hint at the reluctance for substantial reforms. While the situation remains uncertain, the current focus on power dynamics poses risks that Beijing seems willing to embrace. The correlation between political stability and economic prosperity is being tested in China’s current landscape. The lack of investment in social welfare for the elderly and affordability for young families indicates a shift away from prioritizing economic advancement. The absence of actions on these fronts underscores a change in Beijing’s agenda.

Xi personally dictates all policies, prioritizing expenditures in a tech and national-security rivalry with the U.S. Beijing favored infrastructure and property in the past, but now the military takes precedence. The U.S. government estimates China’s defense budget at around $700 billion, surpassing independent NGO estimates of $290 billion and rivaling the U.S. annual defense spending of $800 billion.

Multinational corporations face uncertainty and lack transparency regarding China’s impact on various supply chains. A shrinking Chinese economy could dampen commodity demand, impacting U.S. farmers and other large trading partners. U.S. technology export restrictions aimed at addressing national security risks threaten the significant revenue generated by U.S. chipmakers from sales to China.

Foreign executives are apprehensive about visiting China because they have uncertainties about being able to leave the country, further hampering off-shore development. The global financial landscape is shifting as investors seek alternative opportunities in countries like Canada, the Philippines, South Korea, Vietnam and Mexico. All areas beyond Beijing’s influence and not communist countries.

Earlier this month, the House Select Committee on Chinese Competition held a hearing in New York City, urging witnesses to indicate the risks posed by the Xi’s shifting focus from capital flow to regional dominance. One area of particular concern is America’s Midwest, which engages heavily with China, not due to market demand but, for mechanical goods and labor outsourcing.

China’s role as a workshop outweighs its significance as a consumer for the U.S. economy, an important distinction seldom highlighted by most economists. Companies must scrutinize supply chains for vulnerabilities attempting to adapt to Xi’s ever-morphing concept of communist dominance.

In addition to political, supply chain and security problems, China presents currency risks for companies considering to move profits back to the U.S. due to stringent controls. Despite its economic struggles, history shows communism’s inability to achieve the radical implementation of socialism. As a consequence, there is the potential for large-scale civil unrest that has the capacity to dislodge control from the CCP. Communism is causing yet another country to plummet headlong into an era of painful adjustments that promise to reverberate globally.