Crisis of confidence plagues China’s economy

Runaway youth unemployment and ballooning debt highlight the challenges facing Xi’s Communist Party

Let us for a moment peer into a future when China’s economy wobbles and starts to unravel.

Plagued by ballooning local government debt, a sinking property sector and sky-high unemployment among the young, recession looms on the horizon.

A mini banking meltdown, fueled by “bad loans,” spreads as consumer spending dries up. Highly-paid tech jobs then take a hit following Beijing’s crackdown on the big names of China’s economy.

Panic grips the markets and the yuan comes under pressure. At the same time, flash lockdowns continue to erode confidence in President Xi Jinping’s “zero-Covid” policy.

On top of that, economists and investors start to lose faith in China’s economic data. They shake their collective heads at numbers that simply do not add up. 

Does this sound familiar? It should. Already there have been warning signs of the gathering storm to come.

“China is facing a crisis of confidence,” Rob Subbaraman, the head of Nomura’s global macro research, said.

“Households are reluctant to spend over fears of renewed lockdowns, potential homebuyers have lost confidence in participating in pre-sales from financially-strapped developers, and private businesses are holding back on new investments given the darkening consumption and export outlook,” he pointed out as reported by the Reuters news agency.

Data dump:

Put plainly, China risks falling off the employment cliff.

Craig Singleton, of the Foundation for Defense of Democracies

Between the lines: “We are now facing a typical liquidity trap problem. Companies and consumers are cautious in taking on more debt … [and] this may herald a recession,” Wang Jun, an economist at Zhongyuan Bank, said on Monday.

Delve deeper: Another economic threat is unemployment among young people aged between 16 and 24. Last month, it surged to nearly 20%, the highest on record.

Mounting pressure: There is hardly a sector that has not been hit by Beijing’s economic bungling, orchestrated by President Xi Jinping.

Tech turmoil: A massive clampdown on big tech has seen “more than $1 trillion” wiped off the value of Alibaba, Tencent and Meituan. “Skeptics say the biggest problems facing the sector still haven’t been resolved,” the Wall Street Journal reported last week.

Testing time: To add to the uncertainty, there has been a succession of flash lockdowns across the country. “As the Chinese economy is now slowing down rapidly, in part due to Beijing’s zero-Covid policy, the debt bomb is ticking much louder,” Minxin Pei, of the Claremont McKenna College in California, said.

Big picture: Economic stability is at the heart of the Communist Party of China’s right to rule. But President Xi’s “zero-Covid” policy is gradually strangling that.

State of play: “Put plainly, China risks falling off the employment cliff. And China’s leaders know it – even if their proposed policy prescription, such as sending urban students to work in the countryside, harken back to a bygone era,” Craig Singleton, of the Foundation for Defense of Democracies, said.

China Factor comment: The headline on Singleton’s commentary in Foreign Policy sums up the state of the world’s second-largest economy – “Xi’s Great Leap Backward.”