Year of the Dragon: China's economic challenges and surging uncertainty ahead

We are entering the Year of the Dragon. It is said that the next 12 months will be energetic; the year may give rise to celebrations and grandiose projects and may even be auspicious for marriage, birth and new beginnings, but it may also be a time of surprises when opportunities can be grasped or lost. Natural disturbances can also be expected.

The element presiding over the coming year is Wood which: “gives an animal mobility and vitality, a supple and balanced creative power, and a quality of softness. Wood years are years of transformation," say the astrologists.

What does it mean for the Middle Kingdom?

We shall not go for any predictions but look at some facts. The Dragon Year will certainly see some great surprises and disturbances in the coming year in China and first in the economic domain.

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China’s growth

The International Monetary Fund (IMF) recently noted that “uncertainty surrounding the Chinese economy is high. The organization expects the world’s second-biggest economy to grow by 4.6% this year and slow down to 4% in 2025,” adding that “the ongoing housing sector crisis could further dampen private demand and confidence and lead to budget strains.”

Last year, the Chinese economy officially grew by 5.2 per cent, but the figures coming from Beijing are most of the time exaggerated.

The IMF report also warned: “Deeper-than-expected contraction in the property sector could further weigh on private demand and worsen confidence, amplify local government fiscal strains, and result in disinflationary pressures and adverse macro-financial feedback loops. Staff estimate that, in such an adverse scenario which entails a deeper and more prolonged contraction in the property sector, GDP in 2025 could be 1.8% lower compared to the baseline (of 4%).”

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The IMF believes that weaker exports and lending could exert greater strain.

Housing is an issue

According to The Nikkei, China is grappling with the aftermath of its bursting housing bubble: “Given weak sales and an inventory build-up in the sector, it is now expected to take more than five years for the country to shed excess stock.”

As China’s housing demand will likely fall further due to a shrinking population and rising living standards, the world is bracing for a surge in exports of cheap building materials from the country.

The Tokyo-based publication explained: “Intense price-cutting competition is underway as the country’s housing market becomes saturated. The level of excess stock, calculated by subtracting all the residential floor space sold from the total area of homes built, reached just under 5 billion sq. meters at the end of 2023. Assuming each home has a floor space of 100 sq. meters and three family members, China now has excess space to house 150 million people, equal to about 50 million homes.”

Gold purchase

Another sign of the weakening of the economy is that gold purchases have soared 30 per cent, mainly because of the businesses’ anxiety.

In another article, The Nikkei said: “Chinese gold purchases rose 30% in 2023, as the country’s central bank bought the commodity to replace its dollar holdings amid tensions with the US and individual investors sought a haven for their assets as the economy stumbled.”

It quoted data from the World Gold Council’s 2023 Gold Demand Trends report: “The world’s central banks acquired 1,037 tonnes of gold last year on a net basis, the second most in data going back to 1950 behind only the 1,082 tonnes for 2022. The People’s Bank of China’s net purchases totaled 225 tonnes, the highest since 1977, the earliest data available for the country.”

The article cited geopolitical risks such as Russia’s invasion of Ukraine which drove up gold purchases in countries like Poland, which bought 130 tonnes last year, and Libya, which acquired 30 tonnes.

It perhaps explains that gold ingots have become popular even with Chinese individual investors.

Deflation

Citing the National Bureau of Statistics, Wion News Channel observed that the Consumer Price Index (CPI) experienced a 0.8 per cent year-on-year drop, marking the most significant decline since September 2009, following a 0.3 per cent decrease in December: “China encountered its deepest deflationary threat since 2009 as consumer prices witnessed a severe decline in January, highlighting the persistent challenges for the world’s second-largest economy in its struggle for recovery.” The news channel further commented: “The persistent deflationary pressure depicted in China’s CPI data underscores the urgency for decisive and swift actions by policymakers to prevent the entrenchment of deflationary expectations among consumers.”

There is no doubt that the post-COVID recovery has been lacklustre.

Foreign companies

On 24 January, the German Chamber of Commerce Abroad published a survey which found that 46 per cent of German companies operating in China believed that their Chinese competitors will become leaders in their respective industries within the next 5 years: “About 83% of German companies surveyed believe that China’s economy is declining, though 64% anticipate this downward trend being just a temporary 2-3 year slowdown.”

The next day, Lianhe Zaobao, the largest Singaporean Chinese-language newspaper said that the Germans found that “the number of German companies withdrawing or considering abandoning the Chinese market has doubled in the past four years. The survey’s findings, which come as China’s economy continues to weaken, highlight the challenges facing German companies operating in China. Top concerns cited by German companies include increased competition from local Chinese companies, unfair restrictions on market access, economic headwinds and geopolitical risks.”

The same Singapore publication commented on the vacancies of office place in Beijing; it observed: “Demand for office space in Beijing has fallen as China’s economy weakens and companies are becoming more conservative about expansion.”

Citing the Chinese economic publication Caixin.com, it added that the vacancy rate for Beijing office space has hit a 13-year high of 20.4 per cent, the first time in recent years that the rate has goes over 20%: “The shrinking technology industry in Beijing, coupled with conservative growth strategies and cost-cutting measures adopted by companies facing stiff economic headwinds, have combined to dampen office rental demand.”

The Caixin explained that the trend was attributable to companies relocating their headquarters out of Beijing, downsizing and taking less rental space, and an overall lack of new demand to replace surrendered office space.

Not overtaking the US

In an interview quoted by Reuters, Cornell University professor Eswar Prasad pointed out the fact that China’s economy “faces a variety of fragilities” and the Middle Kingdom’s economy may not overtake the US’ soon. “The likelihood of the prediction that China’s GDP will one day overtake that of the US is declining,” said Eswar Prasad, who served as an IMF official in charge of China.

When asked about his forecast, Prasad answered: “China faces a variety of fragilities, including undesirable demographics, a collapsing real estate market, deteriorating investor sentiment at home and abroad and the lack of clarity over a new growth model. Even a 4 per cent-5 per cent growth rate will be difficult to sustain over the next few years. The likelihood of the prediction that China’s GDP will one day overtake that of the US is declining.”

It is a fact that the Chinese stock market has been continuously declining since mid-2023, reaching new lows as the Shanghai Composite Index fell below 2,700 points on 2 February.

How to vent frustration?

On 3 February, the E_poch Times noted an_ interesting development; many investors who suffered heavy losses flooded the comments section on the official Weibo account of the US Embassy in China.

As the official propaganda machinery controls the Chinese Net, they found a way to vent their frustration, some even imploring the United States to take over the Chinese stock market.

One Chinese investor commented: “We know they are lying, and they know they are lying. They know we know they are lying, and we know they know we know they are lying. But they still keep lying. Can you tell me which ‘glorious era’ this description refers to?”

Another post by the US embassy about the Third Anniversary of the Military Coup in Myanmar was flooded with messages from Chinese stock investors asking for help from the US: “America, please come and rescue the hundreds of millions of A-share investors in deep trouble,” another wrote “Save the poor Chinese stock investors. I love America,” while someone said: “The official media doesn’t let us speak. I come here to request rescue.”

It is certainly not the US which will save the Chinese investors; the only question is can Xi Jinping and his advisors be swift and agile enough to change the tide and restore the trust in the ailing Dragon? One can seriously doubt it.

The writer is Distinguished Fellow, Centre of Excellence for Himalayan Studies, Shiv Nadar Institution of Eminence (Delhi). Views expressed in the above piece are personal and solely that of the writer. They do not necessarily reflect Firstpost_’s views._

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