The End of China’s High-Paced Growth

November 22, 2021 Updated: November 22, 2021

News Analysis

China’s economic growth is flagging, owing to low consumer demand, diminished raw-material imports, decreased factory output, supply side issues, and high factory gate prices.

Threatened by heavy debt and a real estate industry on the brink of crisis, China’s economic growth has dropped to levels not seen in decades.

As with most countries, at the beginning of the pandemic in early 2020, China went under strict lockdown, and economic activity ground to a halt. The economy recovered steadily, until it peaked in March 2021. Since then, economic momentum has been in decline. GDP growth in the third quarter fell to 4.9 percent, one the lowest quarters in the past 30 years.

Credit grew at the slowest pace since 2003 and real estate investment has remained weak. Home sales are down, as are new construction starts. CPI-inflation is lower than expected. Imports have decreased. An energy crisis has caused some factories to halt production. And new factory orders have experienced a downward trend over the past three months.

One positive indicator is that factories already have enough orders for the first quarter of the new year. Therefore, exports are not expected to decline significantly in the next several months. Exports, however, have become a smaller component of China’s economy. Additionally, Chinese leader Xi Jinping is demanding that the economy turn inwards and focus on domestic consumption. Consequently, even adequate factory demand, predicted for the first quarter of 2022, will not be enough to buoy the entire economy.

Both the demand side and supply side of the economy are showing signs of slowing. Restaurants, catering, and retail sales in physical stores have suffered the most under the strict pandemic lockdowns of 2020. This year, Xi’s continued zero-covid policy is still causing lockdowns and restrictions, which are preventing retail, restaurants, catering, gyms, and other services like haircutters from recovering. Meanwhile, consumer confidence has still not returned to pre-pandemic levels, and people would rather save than spend.

Epoch Times Photo
Tourists and shoppers walk by a Li-Ning store, a Chinese sportswear brand, at a shopping district in Beijing, China, on April 16, 2021. (Kevin Frayer/Getty Images)

The service sector is one of the largest employers, providing jobs for as many as 83 percent of employees in some cities. With ongoing, sporadic lockdowns and restrictions, many individuals and families have sill not recovered from their loss of savings and wages in 2020. Hesitancy to spend is a logical response for people who do not know when the next lockdown and loss of income will come.

The supply side is marred by a decrease in the ability of factories to produce. This has been predicated on unavailability of raw materials, as well as increased prices of raw materials, shortages of energy and fuel, zero-covid policies, government pollution regulations, and a lack of financing. Due to increased restrictions on bank lending, fixed asset investment is down. Additionally, without financing, the real estate sector could continue to be the biggest drag on future economic growth.

Car sales are down, partly because of the demand side, as consumers are afraid to part with their cash, and partly due to the supply side, as a chip shortage has decreased production. Another supply side problem is factory gate inflation—the price of a product at the factory continues to rise. Commodity prices are also increasing, while government pollution curbs are limiting steel production. And, in its attempt to reduce carbon emissions, Beijing is also restricting the production of fossil fuels, which has caused energy shortages, further suppressing factory activity.

The gap between producer and consumer inflation is widening as products become more expensive to produce, but producers are hesitant to raise retail prices for fear of dampening an already weak consumer demand.

The Chinese Communist Party’s (CCP) supply side reform measures include reducing excessive capacity, particularly in the property sector. There have also been consolidations, which decrease the asset-to-debt ratios of companies. These measures, however, do not address the fundamental causes of debt and may even encourage more borrowing because, after consolidation, the company’s creditworthiness increases.

A decrease in the availability of coal, coupled with an increase in price, has led to a decline in economic output in some provinces. The National Development and Reform Commission (NDRC) has the authority to set prices on certain critical goods, when it feels that market prices are distorted. Coal prices recently skyrocketed in China because of increased demand, electricity shortages, and the coming winter, leading to a 260 percent increase in price, compared to the previous year. NDRC reacted by setting a cap on coal prices.

In general, if a government puts a price cap on a commodity, it will cause a shortage, because consumers will want to buy more and suppliers will want to produce less. But in the case of China and coal, the country is such a large consumer of coal that it is a price maker. Consequently, due to CCP price caps, the price of coal in the region has dropped. Newcastle coal prices, the industry price benchmark, fell 30 percent on Nov. 1 as a result of China’s price curbs.

The CCP’s ability to influence global commodity prices underscored the extreme dependence of some countries—particularly resource-rich developing countries—have on China for their entire economy. In spite of CCP intervention, however, coal is still up 160 percent compared to last year, suggesting that there will still be price inflation in China and around the world.

Things look bad for China, but it would be premature to believe that this is the end of the country’s position as the world’s second-largest economy. It does, however, cast doubt on the inevitability of China displacing the United States for the top position. U.S. trade tariffs and sanctions remain in place. Foreign companies are leaving China for a host of reasons, including the zero-tolerance covid policy, which is making it harder to manufacture and ship from China.

Baring a complete collapse of the real estate and financial industry, under the burden of $5 trillion in real estate debt, $3.97 trillion in regular local government debt, $7.8 trillion in off-balance sheet lending to local governments, $540.79 billion in bad loans, and $990.22 billion of “special mention loans,” next year will not mark the end of China’s economy, but will most likely mark the end of China’s hyper development. In the first half of next year, real estate investment is expected to fall by 10 percent. And Beijing is expected to pick a growth target of around 5.5 percent, while many analysts forecast China’s 2022 GDP growth to be below 5 percent.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Antonio Graceffo, Ph.D., has spent over 20 years in Asia. He is a graduate of Shanghai University of Sport and holds a China-MBA from Shanghai Jiaotong University. Antonio works as an economics professor and China economic analyst, writing for various international media. Some of his books on China include "Beyond the Belt and Road: China’s Global Economic Expansion" and "A Short Course on the Chinese Economy."