China’s economic illusion is looking like a lie

President Xi Jinping is peddling an economic illusion built on the rocky, red foundations of debt. Even China’s manufacturing muscle is unlikely to rescue flatlining growth amid rising unemployment and shrinking consumer spending.

Last week, the National Bureau of Statistics reported that the economy grew by 4.3% in the second quarter to June. It was one of the lowest readings on record. Yet even those numbers were branded figments of Beijing’s imagination.

As Semafor pointed out, “many experts question whether the world’s second-largest economy” managed to “achieve that.” A warts-and-all assessment hovered around a zero growth rate, while The Wall Street Journal talked about an “economy in outright recession.”

“For all the worry about how America has become one big bet on AI, a more alarming story is unfolding in the other economic superpower. China’s vaunted AI prowess is concealing deep rot in its economy,” Ruchir Sharma, the chairman of Rockefeller International, said.

“Though many forecasters keep expecting China to surpass the United States as the world’s leading economy, its growth peaked in 2021. Since then, China’s share of global GDP has fallen in nominal terms from 18 to 16.5%,” he wrote last week in the Financial Times.

Total debt amounts to nearly 350% of GDP – higher than in the US.

Ruchir Sharma, Rockefeller International

Between the lines:

• As we reported in May, the economy is, at best, stagnating and, at worst, shrinking.
• Growth is driven primarily by government investment, with returns often secondary.

Delve deeper: But these smoke-and-mirror tactics fail to address rising unemployment. They also fail to mask mass closures of small and medium-sized businesses, as well as local governments weighed down by trillions of dollars of debt.

Big picture: The lingering legacy of the “biggest property crash in history” has also “destroyed US$18 trillion” in household wealth, according to research firm ICIS. Shriveling spending at home has only sparked a China export shock abroad.

Bottom line: “Unlike the US and most other countries, [Beijing] has rapidly mounting debts in the private sector as well. Total debt amounts to nearly 350% of GDP – higher than in the US despite China’s much lower per capita income,” Sharma warned.

China Factor comment: The sheer incompetence of Xi’s economic policy has also been quietly covered up by the Communist Party state. “China’s export-led growth is looking more and more unsustainable,” Fortune reported earlier this year.