Good economic news has at last emerged in China. Some media sources have extended this news to declare that China has turned a corner. That is possible, but such declarations are likely getting way ahead of reality.
China still faces tremendous economic headwinds, some the legacy of past mistakes, some the product of growing hostility in the West and Japan, and some stemming from serious demographic problems. Even if things have improved somewhat from last spring and early summer, and that is by no means sure, these impediments will keep China from recapturing anything near its former economic momentum.
The balm of good news arrived in several spheres. Retail sales rose in August by some 4.6 percent above August last year. That figure exceeds by quite a margin the 3.0 percent growth of consensus expectations and the 2.5 percent figure recorded for July. Industrial production also picked up, expanding in August 4.5 percent above year-ago levels, above the consensus expectation of 3.9 percent and the July figure of 3.7 percent. Value added from manufacturing came in 5.4 percent above year-ago figures in August, with the production of solar cells and service robots up more than 70 percent from a year ago. Banks reported a pickup in demands for loans, while urban unemployment edged down to 5.2 percent of the workforce in August from 5.3 percent in July.
Though an improvement over the recent past, this news does little to erase the abiding fundamental problems facing China. Residential real estate is the most immediate. Under past government guidance, housing across China had been horribly overbuilt, with residential real estate development rising at times to some 30 percent of the nation’s gross domestic product.
In the process, real estate development firms had become highly leveraged, so when Beijing, a couple or three years ago, pulled back on promoting such activity, the firms involved began to collapse. The real estate giant Evergrande started its downfall in 2021, and since then, developers, large and small, have declared themselves unable to meet their obligations. Most recently, another giant, Country Garden, declared its problems.
At each failure, homebuyers and lenders, who had depended on these developers to meet their obligations, found themselves in financial trouble and unable to maintain former levels of spending and economic activity. What is more, the accompanying fall in real estate values drew down the net worth of Chinese households at all income levels, making all reluctant to spend—a fact that has become increasingly evident despite the recent improvement in consumption statistics. Nor is there any sign that the pressure is lifting. New home starts for the first eight months of this year have fallen 23 percent from year-earlier levels, while home prices have fallen in 52 of China’s 70 major cities, up from the 49 recorded in July.
At the same time, capital investment—long a mainstay of China’s economy—continues to lag. Fixed investment in new facilities and equipment grew only 3.2 percent this August over August a year ago, lower than the consensus expectation of 3.3 percent growth and slower than July’s 3.4 percent. The figure would have been that much lower except that Beijing is pushing infrastructure spending through state-owned businesses as well as local and provincial governments. Capital spending by private businesses continues declining, falling 0.7 percent below year-ago figures in the year through August, a downward acceleration from the 0.5 percent recorded for the year through July and 0.2 percent recorded for the year through June.
In an oblique recognition of the severity of this problem, the People's Bank of China has tried to free up funds for capital investing by cutting the percentage of cash banks need to hold by some 0.25 percentage points.
Lurking behind these more immediate problems is the decision by Western and Japanese businesses to transfer their sourcing away from China, mostly to elsewhere in Asia and Latin America. Part of this move reflects the increasingly hostile attitude of American, European, and Japanese governments toward Beijing. Part reflects the damage China did during the pandemic and afterward to its reputation for reliability. And part reflects the inescapable rise in Chinese wages and other costs compared with other venues. While Beijing talks incessantly about making China more self-sufficient economically, the nation’s prosperity and wealth still depend significantly on foreign sourcing and exporting.
Demographics present a still more fundamental economic problem. Decades of low birth rates in China increasingly deny the economy a supply of youthful workers to replace the large generation of workers now retiring. Compounding this problem is how China’s continued dependence on manufacturing for export and inability to develop a sophisticated service economy has denied employment opportunities to millions of Chinese university graduates, wasting their talents and denying the economy returns on the resources used to educate them.
August’s run of good economic news has prompted many media outlets to declare that China will, after all, meet its 5 percent real growth target for 2023. That might actually occur, but ultimately, hitting the target means little. The more important point by far is that Beijing had to reduce its target in the first place. It is far below—by half, in fact—the growth pace that has typified China during most of the last 40-some years. Most important of all is that China can expect much slower growth for some time to come.