China's economic woes: How sluggish consumption, property crisis and deflation fears are impacting growth

China’s top leadership is set to meet on Monday to thrash out plans to boost growth, but the country’s economy remains weakened by sluggish consumption, a property sector in crisis and deflation fears.

A high youth unemployment rate – 14.2 percent in May – and economic uncertainties are weakening consumption, one of the driving forces behind the Chinese economy. China plunged into deflation for four months last October, with the sharpest contraction in consumer prices for 14 years in January.

They have since returned to positive territory but are rising only slightly, with June’s increase just 0.2 percent, according to data released on Wednesday. Stagnant or falling prices are bad for the economy’s health, forcing firms to cut back to clear their stocks or reduce production in the absence of demand, which weighs on their profitability and willingness to hire.

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Real estate in crisis

The property sector, which enjoyed two decades of meteoric growth as the population’s standard of living rose, long accounted for more than a quarter of China’s GDP. However, it has been under pressure since the government tightened credit conditions for property groups in 2020 in order to reduce their debt. Many such firms are now on the verge of bankruptcy.

That disincentivises

Chinese people to invest in property, especially as real estate in China is often paid for before it is even built. The fall in prices per square metre is also a blow to the wallets of homeowners, who have long seen property as a safe investment.

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Local authorities in debtThe finances of some local authorities are stretched to the limit, after three years of astronomical spending to combat the Covid-19 pandemic, and above all a property crisis that has deprived them of a major source of income.

The economic context is exacerbating their difficulties, according to analysts at SinoInsider, an American consultancy specialising in China. And they point out that some companies have recently complained about receiving tax arrears dating back to the 1990s.SinoInsider noted that local governments are “trying various methods” to increase their revenues, at the risk of weakening businesses that have already been tested by the economic situation.

Trade under pressure

China’s exports are also a matter of concern for the country’s leaders. Historically they are a major growth driver and have a direct impact on employment for thousands of companies.

But the sector is under pressure from geopolitical tensions between Beijing and Washington, as well as those with the European Union, a key trading partner for the Asian giant.In early July, the EU imposed up to 38 percent additional customs duties on imports of Chinese electric cars, a decision that could become final in November.

Brussels accuses Beijing of illegally favouring its manufacturers through subsidies.

Weak investment

The economic situation in China, geopolitical tensions with Washington and the risk they pose to supply chains are holding back foreign investment. The Chinese economy has potential, with its doors wide open, and private investment is welcome, say China’s leaders, who in recent months have stepped up their efforts to attract foreign business leaders.

Over the period from January to May, foreign investment nevertheless fell by 28 percent year-on-year, according to figures from the commerce ministry.- Financial pressure -Given the economic climate, the financial sector is reluctant to invest in traditional growth sectors, fuelling an “asset shortage”, SinoInsider said.

On the other hand, it is buying more and more “risk-free” long-term government bonds, which is driving down yields. This is helping to depreciate the Chinese currency, with the risk of accelerating capital flight, SinoInsider warned.