China goes back to the 1970s amid economic chaos

Deflation, debt and despair stalk the country as Beijing grapples to solve a ‘crisis of confidence’

China risks getting “old before it gets rich” amid an economic crisis that makes a mockery of distorted GDP numbers. Last year, the economy grew 5.2%, official data from the National Bureau of Statistics revealed.

The figures were in line with government expectations after the economy was trashed in 2022, shattered by rolling Covid-19 lockdowns. Still, they did highlight “the slowest growth rate in more than three decades.” As Shehzad Qazi, of China Beige Book, pointed out:

What China saw last year was possibly the most disappointing post-Covid recovery imaginable. The economy limped to [the] calendar’s end.

“Any true acceleration next year will require either a major global upside surprise or more active government policy,” the consultancy’s managing director said as reported by Agence France-Presse.

As for last week’s numbers, industrial output, covering manufacturing, mining and utilities sectors, increased 4.6% in 2023 compared to a year earlier. Retail sales jumped 7.2% during the same period amid deflationary pressure. 

Property sector

But the statistics are based on an economy mired in local government debt totaling trillions of dollars and the wreckage of a collapsed property sector. They barely tell the real story about the state of China, according to a Reuters report:

Analysts at Deutsche Bank estimate that nominal GDP growth last year was just 4.2%. Putting 2020 aside, that would be the lowest annual nominal growth since 1976, the year Mao Zedong died.

“Of course, China’s economy today is unrecognizable from the mid-1970s in its makeup, size and importance to the global economy. But this is a marker,” the news agency said.

China’s population is shrinking as births decline. Image: Courtesy of Xinhua

Where have all the people gone?

Another crucial concern is the country’s shrinking population as the workforce grows old and the birth rate dips. In 2023, there were just 9.02 million births, or half as many as in 2017, official figures showed.

“Set alongside China’s 11.1 million deaths, up 500,000 on 2022, it means China’s population shrank 2.08 million in 2023 after falling 850,000 in 2022. That is a loss of about three million in two years,” Xiujian Peng, of Victoria University in Australia, said, adding:

The two consecutive declines are the first since the great famine of 1959-1961, and the trend is accelerating.

“The death rate is climbing as an inevitable result of the population aging, and also an upsurge of Covid in the first few months of 2023,” Peng wrote in a commentary for The Conversation, an academic website.

Record high

Yet shriveling numbers have failed to boost job opportunities. Unemployment among the young hit a record high of 21.3% in June before Beijing suspended publishing the figures.

In a move to bury the bad news, the National Bureau of Statistics came up with a new model, with the jobless rate falling to 14.9% in December. Sleight-of-hand tricks can do wonders. 

Even so, China Factor reported that unemployment for those aged between 16 to 24 was as high as 46% in August, according to Zhang Dandan, of the prestigious Peking University. 

China has a major local government debt problem. Image: Shutterstock

Deflation, debt and despair

Still, a broader malaise has engulfed the world’s second-largest economy, revolving around the three “Ds” of deflation, debt and despair. For many in China, “it feels like a recession” or a “crisis of confidence.”

A point hammered home by Zhu Tian, an economics professor at the China Europe International Business School in Shanghai:

We’re in a recession. If you talk to 10 people, seven will say we’ve had a bad year.

“I don’t think the government can afford that. This cannot go on forever,” he said, urging more stimulus measures to break out of a “vicious cycle” of diminishing confidence.

Fallout from the property crash is at the heart of the problem. People feel poorer as they rein in spending, setting off a deflationary cycle. 

Perfect storm

“In China, 96% of the roughly 300 million urban households owned at least one apartment in 2019, according to the latest central bank data. A third owned two, and a tenth owned more. About 70% of household savings are invested in property,” Reuters reported.

To complete the perfect storm, local government debt is out of control. 

The International Monetary Fund and Wall Street banks estimate that the total outstanding off-balance-sheet government debt is around US$7 trillion to $11 trillion,” The Wall Street Journal stressed.

Still, “no one knows” what the actual total is as Beijing struggles to contain the three “Ds.”

“China’s deflation is the deflation of hope, the deflation of optimism. It’s a psychological funk,” Minxin Pei at Claremont McKenna College in California, told Business Insider.

And hope is in short supply.