5 things about China’s struggle to get out of Covid shock to its economy

China’s economy once hailed as the engine of global growth, faced a tumultuous 2024 affected by a series of economic and geopolitical challenges. The interconnected causes of the COVID-19 pandemic resurfaced deep structural vulnerabilities in China’s economic model, such as faltering domestic demand and an upsurge in external pressures.

The aggressive moves taken by the government toward stabilising the economy did little to provide relief this time.

This year-ender highlights five critical aspects of China’s struggle to emerge from the daunting calamitous situation that envelops the economic sphere on account of the pandemic.

Never really recovered from COVID shock

China’s economy faced a continuing sluggish recovery in 2024 due to the consequences of the COVID-19 pandemic. Even though effective control of the virus had been achieved in the early days, long-drawn lockdowns, disruption in the supply chain, and a drop in the consumer’s confidence left deep painful marks on the country’s economic bedrock.

The nation’s GDP growth is fixed below prior-to-COVID-19 levels, with growth forecasts for 2024 lingering around 4.5% -far from double-digit rates achieved once. Domestic consumption, as one of the critical pillars of the economy, did not gain traction due to households prioritising savings over expenditures because of fears about uncertainties ahead.

The large manufacturing sector of China struggled to find its feet on aggregate, with factory output remaining erratic owing to weak demand at home and abroad. The youth unemployment rate is at its all-time high, resting above 20%, reflecting the broader challenges of creating sustainable jobs in such a post-COVID-19 economy. Observers noted that the structural issues in the Chinese economy worsened by COVID-19 remain unresolved, stymying a strong recovery.

The BRI burden weighing high on the economy

Once a cornerstone of China’s global economic diplomacy, the BRI has now been hit hard and has become a significant financial strain. Several allies of China under the BRI framework have struggled to repay loans, leading to rising concerns over China’s ballooning external debt. In 2024, there were increasing calls on Beijing to restructure or waive loans from mainly African, South Asian, and Latin American countries.

The financial burden of the BRI has compounded domestic economic difficulties. More than 40% of BRI projects were either delayed or cancelled, stalling the initiative’s return on investment. The insistence of the Chinese government on funding these projects amid domestic malaise drew fire as resources that could have been directed towards stabilising the domestic economy were instead allocated abroad.  Experts noted that declining returns on investments made in the BRI may impede China’s economic resilience in the long term.

Property prices crashing

China’s property sector, once regarded as an engine of growth witnessed a downturn in 2024. Property prices in major cities plunged almost 15 to 20% in Shanghai, Beijing, and Shenzhen. The property crisis was tied to over-leveraging suffering from indebtedness among developers like Evergrande and Country Garden. Financial contagion engulfed the sector affecting suppliers, contractors and financial institutions linked with real estate investments.

The Chinese government’s efforts such as easing mortgage restrictions and injecting liquidity into the sector to stabilise the market, yielded limited results. Sceptical of stability in the sector, homebuyers shunned purchases, resulting in an excess of unsold units. While its protracted downturn hurt expansion, it also wiped out families’ wealth, as many Chinese households have their savings locked in real estate.

Economy not responding to stimulus measures

In 2024, the Xi Jinping administration unveiled a series of stimulus measures to take the economy back on track. The measures included tax cuts, increased infrastructure spending, and monetary easing policies with reduced interest rates and reserve requirements for banks. However, the desired results were not met as economic indicators continued to be dull.

The bad performance was attributed to several structural issues plaguing the economy, including high levels of indebtedness, declining productivity, and poor consumer confidence. Businesses were unwilling to invest in expansion or hire new employees amid uncertain market conditions. Households saved rather than spent the money from government stimulus measures. Critics say that the government’s top-down framework ignored the imperative of making deeper reforms, notably in aspects like lessening inefficiency within state-owned enterprises and seeing to the growing sector of private enterprises.

Geopolitical tensions challenge China’s export-driven growth model

The export-oriented economy of China faced greater challenges in 2024 from rising geopolitical tensions. The Eurasian trade war shows no sign of abating with new tariffs added on Chinese goods and further restrictions reimpose to put technology export ties under tight control. Coupled with the eruption of tensions with the European Union on human rights issues and trade imbalances, access to major markets remained highly distorted for China.

In Asia, tensions with neighbouring countries India and Japan over territorial disputes and regional security further complicated trade partnerships. The major country’s quest for diversifying their supply chains motivated by a desire to lessen dependence on China served to significantly weigh down Chinese manufacturers. The multinational corporations’ “China Plus One” strategy has indeed accelerated the transfer of production facilities to countries like Vietnam, India, and Mexico.

The Chinese response became a fresh approach in the use of domestic consumption and wooing of emerging markets but has produced very little success. Experts warn that even with a 360-degree shift in economic policy to resolve the geopolitical disputes between China, the export-driven growth model will keep coiling back on itself.