Troubles are coming to the Chinese economy not as single spies but as battalions. Those troubles are now casting a dark cloud over the economic growth prospects for the world’s second largest economy and until recently the world’s main engine of economic growth. On the positive side, China’s economic woes could provide much needed inflation relief to the world economy especially in the form of lower international commodity prices in general and oil prices in particular.
Among the more serious of China’s economic troubles are the bursting of its credit and housing market bubble that exceeded that which preceded Japan’s lost economic decade in the 1980s and that of the United States leading up to the 2008–2009 Great Economic Recession. Signs of that bursting include persistently falling housing prices, a wave of loan defaults by most of China’s property developers, including most notably Evergrande and Country Garden, very strained local government finances as a result of reduced land sales, and a declining GDP deflator over the past five quarters.
Heightening the chances that China now faces the prospect of a Japanese-style lost economic decade is the fact that China’s population is declining at a rapid pace as a result of its former one-child policy. That decline together with price deflation will make it very difficult for China to cope with its high level of household debt and its large inventory of unoccupied dwelling. It is estimated that China currently has anywhere between 65 million and 90 million unoccupied dwellings. At the same time, the prospect of deflation threatens to increase the real burden of the debt.
Adding to China’s economic troubles is President Xi’s erratic handling of the economy. Among his economic policy missteps have been his economically disastrous zero-tolerance Covid policy that caused a sharp deceleration in economic growth and his failure to respond in a timely manner to the bursting of the housing and credit market bubble with strong fiscal and monetary policy action. In addition, President Xi has adopted a heavy-handed approach to the country’s high-tech industry and has rolled back many of the Deng Xiaoping’s economic reforms in the early 1980s that laid the basis for the Chinese economic miracle. These missteps have contributed to a loss of foreign confidence in the Chinese economy and to a marked decline in investment.
Yet another source of China’s economic troubles is the rising tide of protectionism both in Europe and the United States. If there is one thing upon which Europe and the United States can agree, it is that they will not tolerate China trying to export its manufacturing overcapacity problem abroad or to flood their markets with cheap electric motor vehicles.
It has to be of serious concern for the Chinese economy that the Biden Administration did not roll back the Trump tariffs on Chinese imports and that both Donald Trump and Kamala Harris are campaigning to bring home domestic manufacturing as part of their America First world view. It has to be of even greater concern that, if elected, Donald Trump is threatening to impose a 60 percent tariff on all Chinese imports into the United States. Such a move by the United States would almost certainly send the Chinese economy into a meaningful recession especially at a time when China is struggling with the bursting of its housing and credit market bubble.
All of this would seem to be a harbinger of a Japanese-style lost economic decade for China that will have major implications for the world economy. No longer will the world in general and China’s Asian trade partners in particular be able to count on China to be their main engine of economic growth. There is however a silver lining. It is that China will be a source of lower inflation for the world economy as it reduces pressure on international commodity prices and as it attempts to compete more vigorously in world markets.
