China’s economy is showing alarming signs of slowing down, sparking fears that the world’s second largest economy could be headed for a major crisis. After decades of rapid growth that propelled China to become a global powerhouse, the country’s GDP expanded by just 6.2% in the second quarter of 2023 – the weakest pace since 1992.
Several factors are converging to put the brakes on China’s economic engine. At the heart of the downturn is a severe slump in China’s vast real estate sector, which accounts for as much as 30% of GDP. Saddled with massive debts, major developers like Evergrande are defaulting on bond payments as home sales and prices tumble. The property downturn is spilling over into weaker demand for raw materials like steel and copper, which in turn is dragging down Chinese manufacturing.
Exports are also taking a hit as the global economy slows due to high inflation and rising interest rates. Shipments from China grew just 3.9% in June 2023 compared to 12.9% in June 2022. Lower demand overseas is compounding the weakness in China’s domestic economy.
Additionally, China’s zero-COVID policy of harsh lockdowns has kept consumers afraid to spend, battering retail sales. The unemployment rate for young people has surged to a record 19.9%, exacerbating worries about social stability.
To arrest the slowdown, Beijing has turned to stimulus measures like infrastructure spending and easier monetary policy. However, unlike in the past, current efforts have failed to gain much traction as businesses and households remain wary.
Most economists believe China’s economy will struggle to achieve the government’s 5.5% growth target for 2023. A prolonged downturn in China would reverberate globally given the country’s hefty contribution to world GDP and its importance as the top trading partner for major economies including the U.S., Japan and Germany.
With its traditional engines of real estate and exports misfiring, China faces a bumpy road ahead. Beijing’s policy options are limited by worries over debt and financial risks. How China manages to navigate the economic turbulence will have critical implications for both its domestic political stability and the health of the global economy.
