Aug 26, 2023 - Economy

China's slow-moving economic disaster

Animated illustration of the yuan symbol slowly melting and distorting.

Illustration: Shoshana Gordon/Axios

China finally reopened its economy earlier this year after years of extreme COVID restrictions. So far, it's a giant fizzle — with profound ramifications for the rest of the globe.

Why it matters: China has been a reliable engine powering global growth for three decades, becoming the world's second-largest economy in the process. That engine, for now, looks to have stalled out.

  • That creates a new suite of problems for its trading partners and new geopolitical risks.

What's happening: Instead of the robust bounceback much of the world experienced with its pandemic reopening, the Chinese economy is muddling along with weak growth, falling prices, a popped real estate bubble, and mass unemployment among young adults.

  • Cracks have been evident in the Chinese growth juggernaut for years, as its government exerted a heavier hand with businesses, constricting private-sector investment.

China's growth has been reliant on real estate investment — built on a lending bubble — rather than shifting toward broad consumer demand.

  • Amid intensifying state control of Chinese business and geopolitical tension, American and European governments are restricting investment in China, limiting its ability to expand in high-growth sectors like semiconductors and aerospace.

Rather than grapple with the underlying problems, Chinese leadership has focused on hiding them.

  • After recent reports showing unemployment among young adults reached 21.3% in June, the government suspended the release of the data.

Hank Paulson, the former Treasury Secretary who deepened U.S.-China economic relations under President George W. Bush, writes in the Washington Post: "Under President Xi Jinping, China has doubled down on the role of the Communist Party as the means to oversee the economy."

  • "This has taken a heavy toll on the entrepreneurial spirit of the Chinese people, which had been the driving force behind past decades of growth."

Between the lines: The usual government stimulus strategies — loosening lending and pumping money into the economy — may be less effective at boosting growth than they were in the past. Chinese consumers and businesses have become more inclined to hoard cash, argues economist Adam Posen.

What's next: Trade with China is a relatively small — and falling — share of the U.S. economy, but 120 countries worldwide count China as their largest trading partner.

  • So Chinese economic dysfunction could ripple across the global economy and financial markets in unpredictable ways.
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