World’s Second Largest Economy in Trouble: Can China Avoid a Recession?

The world’s second-largest Chinese economy is now in deep distress. A prominent American financial publication has said its successful growth model for 40 years stands “broken.” The Wall Street Journal, in a significant Sunday story, wrote that economists now believe that China is entering an era of much slower growth, made worse by unfavorable demographics and a widening divide with the United States that is raising Beijing’s diplomatic profile as a global rival.

China’s slowdown makes investors nervous as it threatens global growth and undermines a recovery already weakening in the United States. Its latest data on retail sales, industrial production, and investment all missed forecasts and showed the country is in a prolonged slump, putting deflationary pressure on the economy.

In addition, Beijing’s zero-tolerance policy on Covid-19 lockdowns has stifled activity. At the same time, its crackdown on the debts of property developers has led to a collapse in the real estate sector, which contributes up to a third of the economy. The result has been a growing boycott of household mortgage payments, as they doubt whether their houses will ever be completed. This is a big blow to the construction industry, which provides a lot of jobs in dozens of cities across the country.

Meanwhile, a trade war with the US has slowed China’s exports and reduced demand for its goods abroad. It has also slowed domestic consumption, contributing to the weakness in the property market and consumer spending overall.

Amid the growing anxiety about China’s stuttering economy, Why aren’t Beijing leaders doing more to revive it? It’s a difficult question, but many investors, analysts, and diplomats say that the country’s leadership needs to deliver the bold policies needed to revive its economy.

This is partly because a debt crisis in China would be very different from the usual global financial crisis, which is often triggered by speculative markets and leads to bank failures, credit crunch, and sharp currency depreciation. Unlike many developed economies, most of China’s debt is held by the state and banks, mostly publicly owned and not subject to sentiment changes among foreign investors. And, unlike a typical debt crisis, China’s high level of domestic saving and capital controls means that the risk of a sudden shift in confidence that could cause bank runs and liquidity crises is unlikely. This makes it harder to reverse the economic trends than if the country had less debt and a more flexible currency. In the past, Beijing has reacted to a reversal in investor confidence by cutting interest rates, which could be done again if necessary. But it is not a surefire fix. It may take time to restore confidence as the economy continues to slow and the underlying problems persist. This may be a long and bumpy ride for the world’s second-largest economy.