China's Economic Fate: Turmoil or Resilience?

The U.S. economy vastly outperformed expectations in 2023, with a widely predicted recession not even happening, despite many economists warning of a harsh inflation accompanied by high unemployment. Instead, the U.S. economy has experienced disinflation.

However, the story has been different in the world’s biggest economy, or second biggest, depending on who you ask. Meanwhile, some analysts expected the Chinese economy to boom after lifting the “zero Covid” measures it had adopted to limit the pandemic back in 2020.

China has underperformed by just about every economic indicator other than official G.D.P., which supposedly grew by 5.2% - but there is widespread scepticism about that number.

So, is the Chinese economy stumbling?

As per official statistics, China is experiencing Japan style deflation, as well as high youth unemployment.

Not a full-blown crisis yet, but there is reason to believe that the country is walking towards an era of stagnation:

1. An ailing real estate market
2. Staggering debt
3. Historic youth unemployment

China’s economic challenges seem to stem from both leadership issues and fundamental flaws in its economic model. President Xi Jinping is to blame here, as he is being seen as a poor economic manager.

Nonetheless, even with better leadership, China still faces an unsustainable economic model fuelled by low consumer spending, and excessive investment rates – which in turn is leading to diminishing returns.

In some ways, China’s current economic situation is reminiscent of Japan after its bubble of the 1980s burst. While Japan managed to respond well, we are not sure China will be on the same level.

Treasury officials have visited Beijing recently, and claimed that they have received assurances that Chinese banks are “doing well” despite turmoil in the country’s financial and real estate markets. 

The Financial Working Group met over the last week, and US Treasury officials “focused on pressures in the financial sector, in the banking sector, stemming from debt problems of local governments and the real estate sector,” Yellen said.

All eyes remain on data coming out of China later this week, with PMI data scheduled to be released on both Wednesday and Thursday.