China, which has had phenomenal development since opening its markets in the late 1970s, is facing a catastrophic problem as a result of developing flaws in its real estate industry, which contributes for roughly 30% of its GDP.
SUMMARY ABOUT CHINA ECONOMY
- China’s economy is stagnating and is expected to develop at a 3.4% annual rate in the longer term.
- Gita Gopinath, Deputy Managing Director of the IMF, believes the have the potential to “turn things around.”
- According to Gopinath, China has the resources to reverse the trend and can do much more in terms of fiscal policy.
All of the high-frequency data coming from Beijing has established that the world’s second-largest economy is slowing, but economists and financial experts are divided on whether they can stage a comeback given the growing challenges such as a sharp rise in youth unemployment, mounting debts, and a slowdown in domestic consumption. According to them observers, Beijing has demonstrated in the past that it has the potential to bounce back, and it may do so again, despite fears that its present obstacles are considerably more severe than those it has overcome in previous years. “Never underestimate China’s ability to make a comeback,” warned Kishore Mahbubani, former UN Secretary-General, in an interview with India Today on Sunday.
Gita Gopinath, Deputy Managing Director of the IMF, believes China has the potential to “turn things around.” “After the first quarter, which was very strong because of the rebound from the re-opening, China’s economy has slowed,” Gopinath remarked in an exclusive interview with India Today Group News Director Rahul Kanwal. “And we see that in private consumption, of course, the real estate sector has had a lot of trouble for a long time.” We noticed some progress in the first few months, but now we’re seeing a decline. That is a source of concern. Investment is down, as is confidence, consumption, and private investment.”
According to CaixaBank Research, which has had remarkable development since opening its markets in the late 1970s, is facing a catastrophic crisis as a result of rising faultlines in its real estate industry, which accounts for roughly 30% of its GDP. Evergrande Group, China’s second-biggest real estate corporation, has already declared bankruptcy, and Country Garden, its largest, is on the edge of failing.
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According to the most recent figures in July, youth (16-24 years) employment increased to a record high of about 21%, while others believe it may be as high as 50%. The downturn has generated a vicious cycle in China, where individuals are unsure about their future income, so they save more, which has reduced spending, forcing enterprises to halt further investment and capacity development since demand has slowed.
Despite the hurdles, Gopinath believes that “The have the resources to turn things around – it can still do much more in terms of fiscal policy and monetary policy.” She stated that Beijing is taking steps in that direction, but that they are not something that can be accomplished quickly. “We anticipate a slowing of China’s growth.” We believe China will be able to fulfill the government’s 5% growth objective this year. However, we forecast their growth to be about 3.4% in the longer run.” She did, however, emphasize that the IMF does not anticipate a severe downturn or recession – “it’s just slowing growth.”
China is the world’s second largest economy behind the United States, with a GDP of more than 19 trillion dollars. Its economic slowdown has also sparked a discussion about whether the economy’s base has reached a point where it is evident that growth would halt. “It is more than that,” Gopinath remarked. “Given the developments we’ve seen, we’ve revised our projection relative to pre-pandemic.”
When asked if the can take over the United States, which has a GDP of almost $27 trillion, Gita responded it depends on their policy actions. “It has demonstrated the ability to change its economic path, but the combination of what we are seeing in the private sector, slowing confidence, and a drop in global demand for manufacturing goods – these are all headwinds for China.”
Gina Raimondo, the US Secretary of Commerce, stated last month that she was hearing from firms that China had become “uninvestable because it has become too risky.” The Covid epidemic was a moment when many corporations and governments realized the dangers of relying too much on one country and placing all of their eggs in one basket, as China has done. Chinese President Xi Jinping’s assault on private actors, such as Jack Ma’s Ant Group, and the system’s opaqueness have led several multinational enterprises operating there to hunt for an other location to move their activities.
Under Joe Biden, the United States has increased taxes on Chinese goods. Biden has barred new US investment in China in critical technology like as computer chips and other such industries, as tensions between Washington and Beijing rise over Ukraine and Taiwan, the semiconductor powerhouse that supplies more than 60% of world chip demand.
According to Gopinath, geopolitical tensions are manifesting themselves in countries distancing apart from one another, such as import bans. “Last year, 3000 import restrictions were imposed, which was three times the number imposed in 2019.” And, if you look at where FDI is moving, it is being driven by geopolitical considerations rather than geographic distance, which used to be more important.”
China is also dealing with another major issue: a shrinking workforce. In July of this year, American economist and Nobel laureate Paul Krugman predicted that China will become the next Japan, which was previously seen as the next powerhouse capable of overthrowing the United States. “Some have speculated that China’s future course may mimic Japan’s. “My answer is that it probably won’t — that China will do worse,” he wrote in The New York Times.
According to Krugman, there are some striking parallels between China now and Japan in 1990. “China has a wildly unbalanced economy, with too little consumer demand, kept afloat only by a hypertrophied real estate sector, and its working-age population is declining,” he explained.
Unlike Japan in 1990, the majority of the Chinese economy was still well below the technical frontier, so it should have greater chances for significant productivity development, according to the economist. However, he noted, there were growing fears that China had slipped into the “middle-income trap” that appears to plague many rising countries, in which growth is strong but only to a point before stalling.
“China is unlikely to be the next Japan economically.” It’s almost certainly going to become worse.”
