China's Economic Growth Slowdown Will Be Long-Term

In November 2023, the International Monetary Fund forecast a 4.6% growth rate for China's GDP in 2024, down from 5.4% the previous year. Deep systemic economic issues, strategic competition, and China's demographic decline signal that the Chinese economic growth slowdown will be longer-term still. States dependent on China for trade, investment, and tourism will experience a decline in economic activity as a result.

Analysis

Domestic Economic Policy

China's investment-led growth strategy is unsustainable. The state-planned economy has focused on excessive investment, stifling the demand side of economic growth.

For the last decade, investment has amounted to a yearly average of 45 percent of China's GDP. This model enabled a rapid development of the manufacturing, property, and infrastructure sectors. Investment has, however, expanded at the expense of consumption. While pursuing aggressive investment, the Chinese Communist Party (CCP) also forced down consumption as a share of GDP and increased national savings. These savings were used by businesses, local governments, banks, and property developers to sustain China's investment-led growth strategy. National savings as a share of China's GDP peaked in 2001 at 52 percent, the highest ever recorded by a country. Household savings have been the largest driver of this, mainly due to demographic factors. In 2018, they made up 23 percent of the GDP, 15 percentage points higher than the global average.

This dual-track policy, pushing up investment and pushing down consumption, has created large imbalances in China's economy, notably in the form of debt. Since 2008, China's debt-to-GDP ratio has doubled to 280 percent. A good portion of this debt is the result of investments in infrastructure and property, much of which—partly due to China's demographic decline—will remain unused. A recent study found that one in four Chinese apartments is empty. As of 2023, 70 percent of Chinese household wealth and investment lies in the property sector, which, in itself, accounts for up to 30 percent of China's GDP.

As a result of unsustainable debt, China's property sector is facing a crisis. Over the last two years several of the country's largest property developers, such as Evergrande, have defaulted. There is concern that a large portion of household wealth, needed to drive consumption, is tied up in the property sector's bubble. China's debt-fuelled growth has generated economic activity, but not lasting economic value.

Strategic Competition

Domestic imbalances are further exacerbated by strategic competition. International export restrictions and declining foreign investment, borne out of geo-political tensions, will further impede the economy's ability to bounce back to previous levels of growth. Foreign direct investment (FDI), a large driver of China's economic growth since its post-pandemic reopening, is negative for the first time. Firms are choosing not to reinvest their earnings back into Chinese holdings and are instead pulling them out of the country. In 2023, these outflows added up to $100 billion. In addition, foreign capital raising for China-focused ventures fell to $5 billion in the first three quarters of 2023, down from $50 billion in 2021. Chinese government crackdowns on firms, rigid national security laws, and restrictive cross-border data flows are the main drivers of this exodus, reflecting a loss of confidence in China's economy.

US government export restrictions on advanced technology to China, notably with regards to semiconductors, will stifle the Chinese market. Washington has also galvanised the support of its allies, such as Japan and the Netherlands, to deprive China of critical resources in the semiconductor supply chain and multiply the effect of its own direct export restrictions, which now include quantum computing and AI.

Demographics and Lack of Government Response

The demographic decline of China, combined with the slow government response to economic crises will impede a reversal of the growth slowdown. China is still hesitant to shift its economy to a consumption-led growth model, which would help counter declining exports and unsustainable investment. Rising distress at the individual level is also impeding such a transition. Chinese consumer defaults reached their highest-ever number at 8.54 million in 2023. Youth unemployment also stood at 21.3 percent in June, prompting the CCP to stop publishing figures. In addition, most of the debt is held by corporations and households, placing further drag on the government's ability to stimulate consumption.

China's population peaked at around 1.4 billion in 2021 and is expected to decline by 100 million by 2050. These demographic trends will impact the dynamism of its economy. China relies on its large and young labour force to boost economic growth. As that labour pool shrinks, so too will China's ability to sustain its manufacturing sector, a key driver of the country's economy. Additionally, the aging population will place a strain on the cost of social services.

Slowdown and Impact

Rating agencies expect China's GDP growth to slow to around 4 percent in 2024 and 2025. China's globally interconnected economy in tourism, trade, and investment will affect developing countries' economic growth, notably in Asia. Already in 2023, China's slowdown shaved 9 percent off the manufacturing industry's profits globally.

Conclusion

Poor consumption and economic bubbles, geo-political competition and an aging population have caused China's economic growth to slow down. The deep and widespread structural nature of these issues will lead to a weaker economic performance in the long term. China's economic slowdown will affect countries dependent on China for trade, investment, and tourism. Developing countries that do business with China will be particularly affected.



Matthieu Lebreton is a Master of Arts in International Relations at JHU-SAIS. His main research interests lie in Indo-Pacific traditional and economic security and Europe's growing role in Asia. After obtaining his BA in Regional Studies of Asia from Georgetown University, Matthieu worked at the International Institute for Strategic Studies' (IISS) Japan Chair Programme, focusing on the economic, trade, and security policies of Japan, the Indo-Pacific, and Europe.