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Chinese Economy On The Brink With Nasty Implications For World Economic Outlook

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The anticipated swift recovery of the Chinese economy in 2023, expected to resume its role as the global growth engine, has hit an unexpected snag, prompting concerns among experts. Described as a “drag” on world output by the International Monetary Fund (IMF), China’s economic slowdown is causing ripples of uncertainty.

Despite grappling with numerous challenges like a property crisis, subdued spending, and elevated youth unemployment, economists predict that China will likely achieve its official growth target of approximately 5% for the current year. However, this falls short of the robust 6%-plus annual growth observed in the decade preceding the Covid pandemic. Looking ahead to 2024, ominous signs are emerging, suggesting the possibility of decades-long stagnation.

Derek Scissors, a senior fellow at the American Enterprise Institute, warns that without substantial market reforms, China might find itself trapped in the “Middle Income Trap,” a scenario where emerging economies struggle to progress beyond a certain income level.

The historic growth of the Chinese economy, characterized by double-digit percentages between 1991 and 2011, has slowed, averaging 6.7% in the decade through 2021. Analysts foresee a further deceleration in the second half of the 2020s, attributed to challenges in the real estate sector and demographic decline.

The IMF, too, paints a gloomier picture of China’s longer-term outlook. Projections indicate a growth rate of 5.4% in 2023, gradually tapering to 3.5% in 2028, facing headwinds such as weak productivity and an aging population.

The roots of China’s economic downturn traced back to policy decisions made during President Hu Jintao’s administration, flooding the economy with liquidity in 2009 and, later, President Xi Jinping’s hesitancy to curb borrowing after assuming power in 2012. Structural problems began to accumulate, exacerbated by a zero-Covid policy and a crackdown on private enterprise, damaging confidence and affecting key sectors of the economy.

The consequences of these policies are evident in weak consumer prices, a deepening real estate crisis, financial difficulties for local governments, escalating youth unemployment, and a negative turn in foreign direct investment. These challenges underscore the fragility of China’s economic landscape.

As the economy faces potential decades of stagnation, some economists draw comparisons with Japan’s “lost decades” following a real estate bubble burst in the early 1990s. While the rest of the 2020s may not mirror Japan’s experience, the downward trajectory raises concerns. A significant long-term concern is China’s changing demographics, with a declining population and a record-low fertility rate, potentially impacting growth potential, fiscal deficits, and investment dynamics.

As China’s leadership contemplates economic targets and policies, efforts to ramp up fiscal and monetary support may provide short-term relief but are unlikely to address the structural issues. Policymakers aim to set an ambitious growth target, yet skepticism remains among analysts who believe that the slowdown is more structural than cyclical, requiring substantial policy changes.

The potential use of traditional stimulus measures, such as increased borrowing, may act as a temporary “pain-killer” but not a cure for China’s economic challenges, according to experts. For those prepping for potential economic uncertainties, understanding the intricate dynamics of China’s economic landscape becomes paramount in planning for the future. How prepared is your family for a global economic collapse? Leave your thoughts in the comments below.

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Tags: , , Last modified: January 15, 2024
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