China at economic crossroads: Why Beijing cannot afford to ‘slow down’

Aug. 15, 2024, 11:06 a.m.

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Top Chinese leaders and experts gather annually during the summer months at the seaside resort of Beidaihe. This tradition of summer retreats was reportedly initiated by the legendary Mao Zedong as early as 1953. While this meeting, generally held in the first two weeks of August, is not simply a summer gathering, it is considered informal and 'secretive'. Although the specific agendas discussed are not publicly revealed, economic policy direction and reform initiatives are likely to have been central topics, taking into account recent economic trends in China.

Advertisement China's weakening consumer spending and economic slowdown are a cause for concern for investors and Chinese policymakers alike. China's growth in the second quarter of 2024 fell short of the anticipated 5% rate. The Chinese economy grew by 4.7% year-on-year (YoY) in Q2 2024. This follows a 5.3% growth rate in the first quarter of the year, which was slightly higher than the 5.2% growth in Q4 2023 and exceeded market expectations. However, the economy experienced its weakest yearly advance since Q1 2023 in the following quarter.

On August 5, the Chinese government announced a 20-point plan aimed at stabilizing and boosting the economy. This plan includes measures designed to encourage spending on a wide array of goods and services, such as electric vehicles, appliances, electronics, food services, and travel. Other measures focus on encouraging private investment, stabilizing the property market, providing tax relief for small businesses, and stimulating rural consumption. It remains uncertain whether these steps will be sufficient to achieve their goals, with experts calling for further measures to boost consumer spending.

China’s economic might is its biggest power — from domestic promise to international commitment — that forms the clout of Beijing’s red aristocracy, which relies on the promise of sustained economic growth. Any compromises in this regard baffle policymakers in China.

The third plenary meeting of the Communist Party of China, held from July 15 to 18, 2024, centered on economic reforms. This included the implementation of market mechanisms, adjustments to fiscal and tax policies, and measures to reduce leverage in the real estate sector. The meeting also addressed social policies, including strengthening social safety nets, promoting consumer spending, and tackling the gap in income between urban and rural areas.

Beyond simply not meeting GDP growth expectations, the Chinese economy faces a range of challenges. These include:

Trade tensions with the US and Western nations have intensified, particularly regarding tariffs on Chinese goods. Recently, China filed a complaint with the World Trade Organisation against the European Union for imposing tariffs on electric vehicles.

The corporate sector and local governments are facing a debt crisis, which can be further explored through IMF reports.

The property market bubble's pricing has also been a concern, with real estate investment declining by 9.5% year-on-year in the first quarter of 2024, reaching 2.2 trillion RMB ($303.5 billion).

Furthermore, the manufacturing sector, one of China's key strengths, is facing difficulties.

Beyond this, several other challenges exist, including an aging population - a shrinking workforce and an increasing dependency ratio; the need for reform within China's state-owned enterprise system; and competition with the West in emerging technologies - particularly in areas like semiconductors and artificial intelligence.

Additionally, the specter of the middle-income trap looms large. The World Bank's recent World Development Report projected that China might require an additional decade to reach even a quarter of US per capita income. Experts suggest that China could potentially fall into the middle-income trap - a scenario where countries experiencing economic growth and reaching 10% of annual US GDP per capita encounter a 'barrier,' hindering further development and preventing them from achieving high-income status.

China achieved lower-middle income status by 1997 and moved into the upper-middle income category by 2010. However, experts believe that China requires a sustained growth rate of 6-7 percent over the next decade to avoid being trapped in the middle-income category and to ultimately reach high-income status.

Advertisement South Korea, Taiwan, and Singapore spent 23, 27, and 29 years, respectively, as middle-income economies before reaching high-income status. Based on these trends, it seems like China should be prepared to take the necessary steps to achieve high-income status.

The Chinese economy undoubtedly represents an economic miracle. This remains a significant factor supporting the authoritarian rule of the Communist Party of China. The promise of economic prosperity for its citizens provides legitimacy to the hierarchical rule and remains the cornerstone of the 'Chinese dream.' These are the years that will shape the legacy of Xi Jinping, a matter of paramount importance to Chinese leaders. While the ivory tower leadership of the CPC can afford to disregard issues of human rights, economic growth is certainly not an area where leniency is acceptable.

Advertisement The opinions expressed in the above piece are solely those of the author and do not necessarily reflect the views of Firstpost.