Growing pains: China’s faltering economy tests leadership’s nerve | Economics

On his tour of the southern Chinese city of Shenzhen last week, Li Keqiang, the premier, tried to send some positive energy at a time many citizens have been complaining of economic hardship.

“China’s opening will continue. The Yellow river and the Yangtze river will not flow backward,” Li said, striking an upbeat tone while visiting Yantian Port, a gateway to Europe and North America, two of China’s biggest markets.

“The waters of Yantian Port will also flow incessantly, and not only will continue to maintain your advantages, but also expand your advantages,” Li added. Yet last year, the traffic was far from incessant: Covid rules shut the port, delaying deliveries over Christmas. This spring, similar restrictions forced vessels to queue to enter.

Since the start of this year, China’s insistence on a zero-Covid policy has caused much inconvenience and uncertainty for its people and the struggling economy, prompting grave concerns inside the country about what comes next.

“The property sector is ailing, investments are all falling, and people are saving rather than spending,” says Hong Hao, a prominent market analyst whose social media account was censored this year after downbeat remarks about the economic outlook.

Hong highlights three big headaches for Beijing policymakers: Covid, property and troubling relations with major western countries. “But there are obstacles all over the place really, and it’s hard to discern which one is the biggest.”

These stumbling blocks will almost certainly lead to China missing its own economic growth target of “around 5.5%” this year, which Li set in March. In another worrying development, the July unemployment rate among 16- to 24-year-olds reached a record 19.9%, according to the National Bureau of Statistics.

So much so, a recent politburo meeting chaired by the president, Xi Jinping, omitted any mention of a GDP goal, instead suggesting the country should “stabilise employment and prices, maintain economic operations within a reasonable range, and strive to achieve the best possible results”.

The worries expressed inside China are palpable, though there is also consensus that if its growth model does not reform, the economy will soon run out of the steam. But any change – for example through Beijing’s tough policies for the property sector announced in 2020 – would result in major disruption, at least in the short-to-near term. In other words, Beijing is facing a real policy dilemma.

“The two fundamental problems for China are a natural growth slowdown and improving its regulatory environment,” says Nancy Qian, an economics professor at Northwestern University in Chicago. “Both are standard growing pains as the economy grows from a low-income to a higher-middle-income one.”

Qian says China’s growth is slowing and will plateau because it has reached limits set by its fundamentals. “One cannot reduce unemployment without creating new jobs. But how can there be new jobs if existing firms don’t make more money? And many firms, like the real-estate firms and construction industry in trouble today, have been doing much worse than we thought.”

The bad economic performance may be unavoidable, but it has real social – and potentially political – consequences. This is particularly the case for a system without the safety valve of elections.

Last month, it emerged that hundreds of homebuyers across the country were huddling together to refuse payments on mortgages on homes left unfinished by developers. On social media, angry buyers discussed ways to attract the government’s attention in order to put pressure on “greedy and dishonest developers”.

Sensing a social crisis in the making, Beijing quickly came up with measures to smooth out the tensions and aid the property sector – which accounts for 25% of the Chinese economy. Some local officials produced novel ideas, such as encouraging party members to lead the buying spree.

“I hope that today all comrades will take the lead in buying property,” Deng Bibo, a county party secretary in Hunan province, urged in a viral video this week. “Buy one property, then buy a second one. If you purchased a second one already, then buy a third. Bought a third? Then buy your fourth.”

Qian says the real-estate crisis is one example of the difficulty of maturing the regulatory system for a rapidly growing economy. Chinese watchdogs and policymakers have known for a while that huge property firms such as Evergrande were borrowing a lot. It worked as long as the economy was growing. But at some point the music stops.

Now China is stuck in a vicious circle. “The faster the slowdown, the bigger the problem,” says Qian. “The less trust consumers have in the economy, the less willing they are to keep paying for incomplete housing, and the bigger the problem. The faster the slowdown, the less trust consumers have.”

China’s domestic trouble also has an international dimension. What was once “the world’s factory” is now entangled in geopolitical battles with many western markets. Last month, Tony Danker, director-general of the Confederation of British Industry, said UK companies were already rethinking their operations in anticipation of the UK’s decoupling with China.

But, perhaps the biggest elephant in the room in China’s economy today is politics, analysts say. In one of Li’s videos during his Shenzhen tour, he was heard likening reforming and opening China to “blazing a trail of blood”. But soon after it was uploaded to Chinese social media, users began to report they were no longer able to view it.

“After users’ complaints and following the platform’s examination, this video touched on political and current affairs content that was not qualified to publish,” the error message read.