China’s recent economic slowdown has raised concerns among economists and analysts worldwide. Many have pointed to various factors, including policy decisions, the aftermath of COVID-19, and structural challenges, as potential sources of trouble for China’s long-term economic growth.
However, a deeper examination of the situation reveals a more nuanced perspective.
Structural Challenges and Policy Priorities
China indeed faces significant structural challenges. These include declining productivity, a shrinking labor force, technology transfer restrictions imposed by other countries, the correction of a real estate bubble, and elevated youth unemployment.
Additionally, the government’s emphasis on party control and national security over economic growth has raised eyebrows. While these challenges may hinder China’s growth compared to previous decades, it’s crucial to assess the situation carefully.
Recent Growth Trends
In the second quarter of 2023, China’s year-over-year growth reached 6.3 percent, showing improvement from earlier. However, this increase was modest and failed to meet investor expectations.
A key contributor to this disappointment was a decline in household consumption. Yet, this decline resulted from unique circumstances, such as weak consumption in late 2022 and the lifting of COVID-19 lockdowns. These factors make the decline in the second quarter less indicative of a long-term trend.
While China’s imports have weakened, a closer look reveals that the decline is primarily due to price effects. In terms of volume, imports expanded in the first seven months of 2023. This suggests that domestic demand may rise, contrary to some pessimistic viewpoints.
Household Savings and Consumption
Some argue that households in China hoard their savings due to increasing uncertainty. However, this phenomenon can be attributed to the circumstances of the pandemic, where lockdowns limited spending opportunities.
In the first half of 2023, household disposable income grew significantly, reducing the share of income being saved. Concurrently, consumption expenditure saw substantial growth, indicating a changing trend in household savings.
Wages and Income
Contrary to concerns about falling wages, average per capita wages in the first half of 2023 grew by 6.8 percent. Additionally, considering various income sources, after-tax income exceeded wage income by 6.5 percent. These statistics suggest that the share of household income is on the rise, painting a positive picture for future consumption growth.
Fears of deflation due to falling retail prices may be premature. A closer examination reveals that much of the decline is attributed to elevated food prices in the same period of the previous year. Core consumer prices, excluding food and energy, have risen, indicating that deflation might not be an imminent threat.
In the first half of 2023, state and private investment weakness can be attributed to high inventories from the previous year. To support household income during the pandemic, the government cut business taxes and discouraged layoffs, which led to production continuing despite declining sales. As inventories decrease, the incentive for increased investment may grow.
Private investment saw a relative slowdown, partially due to increased regulation of internet companies and a real estate market correction. However, regulatory clarity in mid-2023 led to a rebound in recruitment and profitability among private tech firms. While real estate investment is expected to remain subdued, these developments indicate a more positive outlook for overall private investment.