As China's real estate sector crasghes, Evergrande and other developers take the Chinese economy along with them.
Reports are emerging from across the world which point out the fact that the Chinese economy now is at an inflection point. Growth rates have fallen when compared to the last few years. Moreover, there is massive unemployment. At the same time, the real estate sector seems to be in a state of freefall. Furthermore, leading private sector firms like Evergrande and Country Garden are in the doldrums.
Barclays has already cut its forecast for China's 2023 gross domestic product (GDP) growth to 4.5% from 4.9%. Economic activity in China across sectors like retail sales, industrial output, and investment, failed to match expectations, thereby leading to concerns about a longer-lasting slowdown in growth.
What Does This Mean for China's Neighbors?
It means that President Xi Jinping might show an increasing appetite for action on the external front. That is because, on the domestic front, he is clearly on a weak footing. Earlier in August, China came out with a so-called "standard" Chinese map that includes parts of many other countries. And it has enraged these countries.
In addition, the domestic stress could mean that Japan and Taiwan could be in the crosshairs of China.
As already seen, China created a ruckus in the aftermath of Japan's release of ALPS treated water from the Fukushima nuclear plant into the Pacific Ocean in August. Stones and eggs have been thrown at Japanese schools and other establishments in China, among other aggravations. This clearly shows that China will divert attention anywhere it can when it comes to the economic front.
Neighbors Boost Defenses
In addition, China's economic slowdown means that Japan will need to boost its defenses. Already the Kishida Administration has significantly increased the defense budget in light of threats from China and others. The recent Cabinet reshuffle could also be a step in this direction as the foreign and defense ministers have been replaced.
With India too, China seems to be in no mood to relent. It is worth mentioning here that the two countries had fatal clashes in the summer of 2020, the first in almost 45 years. In addition, Xi Jinping recently canceled his trip to India for the G20 Heads of State meeting in New Delhi. This clearly shows that it will ratchet up the pressure on other fronts.
With the ASEAN countries too, things seem to be no better. Beijing is involved in territorial disputes with many ASEAN countries. Already we see that there is a pushback to China's new map. And we also see pushback from the various actors in Southeast Asia when it comes to China's infrastructure projects.
China's Advantages
China is investing in cutting-edge industries like semiconductors and electric cars, however. These industries are likely to gain momentum in the times ahead.
Another factor for China is that it does not have to go through an election cycle and therefore is more resilient to tough decisions. In addition, with its huge population, there should be enough domestic demand when it comes to the economy.
China is also a member of the Regional Comprehensive Economic Partnership, or RCEP. Hence it will be difficult to completely cut off China from the global economy.
Challenges
However China has its own set of challenges.
These include a falling and aging population. Though Chinese authorities have done away with the one-child policy, there are few takers for a second child.
Elsewhere in the government, Chinese President Xi Jinping has already fired his Foreign Minister Qin Gang and two top leaders of its People's Liberation Army Rocket Force (PLARF), which handles the Chinese nuclear arsenal. This clearly shows that not all is well on the domestic front.
In addition, the central government has called on the country's richest provinces, Guangdong, Jiangsu, Zhejiang, Shandong, Henan, and Sichuan ー which account for roughly 40 percent of economic output ー to help the other provinces. This itself shows that not all is well.
Long-Term Impact
The long-term impact of this will be that most countries, other than close allies of China like North Korea and Russia, will decouple from the Chinese economy.
Previously India's leading trade partner was China. But now it has been replaced by the United States and this is certainly good news. Moreover, India, Japan, the US, and Australia are a part of the Quad security dialogue. And these countries are also witnessing a remarkable deal of cooperation on the economic front.
While the failing Chinese economy is certainly news for the global economy, it is not all bad news. It means that there will now be two global economic orders. One is the Sino-centric economic world order. Meanwhile, the other avoids being Sino-centric.
In March this year, Chinese President XI Jinping was elected for an unprecedented third term as the president of the Chinese Communist Party. This means that he has subsumed all powers and has become the most powerful leader after Mao Zedong.
Will China Come Out Of This Slump?
It is difficult to say now if China will come out of this slump. We will have to adopt a wait-and-watch approach.
Meanwhile, there have also been rumors floating around with regard to the health of the Chinese president. Some reports in 2022 suggested he may have suffered from cerebral aneurysm.
In the end, China could very well be a victim of its own progress. Local governments are trying to spend heavily on infrastructure but there seem to be no takers for these projects. In addition, people are also generally spending less because of the pandemic years. As a result, this has brought down demand.
Also, Beijing's zero-COVID policy seems to have had disastrous consequences. Countries like India, Japan, and others would do well to learn lessons from China's economic slowdown and take appropriate steps while there is time.
Furthermore, China needs to worry about falling into what is known as the middle-income trap where it will grow old before it becomes rich. This in itself is posing a big challenge.
RELATED:
- Nikkei Gets it Backwards: Beijing's Giant Fiscal Hole is From Real Estate Overexpansion
- The Qin Gang Saga: What Happened to the Top Commanders of China's Missile Force?
- Beijing's Anti-Japan Campaign and Xi Jinping's Secret Speech at Beidaihe
- The Troubled State of China’s Economy: Nowhere to Expand
Author: Dr Rupakjyoti Borah
Dr Rupakjyoti Borah is a Senior Research Fellow with the Japan Forum. The views expressed here are personal.
