China’s economic ‘transformation’ will not be ‘easy’

Boosting ‘spending power’ and getting to grips with the property crisis have become priorities for Beijing

China needs a new blueprint to resuscitate an economy on life support. Major “reforms” should be rolled out to stimulate “domestic consumption” by “boosting spending power.”

At the same time, Beijing must act to revive an ailing property sector and move to a “more sustainable footing,” which would reduce “local government debt risks.”   

“China faces a fork in the road – rely on the policies that have worked in the past, or reinvent itself for a new era of high-quality growth,” Kristalina Georgieva, the International Monetary Fund’s managing director, said.

“The transformation ahead is not easy,” she told an audience made up of Chinese officials and executives from global companies at the China Development Forum in Beijing on Sunday.

Risk factor:

  • The world’s second-largest economy faces a raft of crucial challenges, including a real estate meltdown.
  • Up to 90% of household wealth in China is tied up in property, which makes up roughly 30% of GDP.
  • A byproduct of the crash has seen local government debt balloon to around US$11 trillion.
  • The aftershocks have rippled across China’s markets.
  • Up to $6 trillion has been wiped off the value of stocks in the past three years before Beijing was forced to act.

China’s household debt steadily rose [in] 2023.

Kaize Zhu of the National University of Singapore

Delve deeper: “An added complexity is the surge in household debt, primarily fueled by the real estate sector,” Kaize Zhu, of the National University of Singapore, wrote in a commentary for the East Asia Forum.

Between the lines: “China’s household debt steadily rose [in] 2023, nearing the threshold set by the International Monetary Fund, with a notable percentage attributable to mortgage liabilities,” he said.

Big picture: Rising unemployment, particularly among the young, and shrinking wages have done little to pierce an atmosphere of gloom. In short, there is a “crisis of confidence” with the ruling Communist Party. 

China Factor comment: President Xi Jinping’s decision to put national security at the top of his agenda has also scared off foreign investment and multinational corporations. They simply no longer trust China’s opaque political system.