Factors Behind the 2023 Economic Slowdown in China & Its Further Implications
In recent years, discussions surrounding the intricate relationship between the United States and China have revolved around the notion of an ‘imminent dawn of a new Chinese century’. The world watched as a new bipolar world order appeared on the horizon, with Western and Eastern powers poised to take centre stage. China's remarkable economic success was a linchpin of this narrative, even as it stood on an ideological foundation at odds with Western principles of economic prosperity.
Proponents of the statist perspective have long applauded China's economic model as a harmonious blend of autocratic state control and capitalism. They have, in the process, issued a challenge to conventional liberal economic theories regarding development, which emphasize the roles of free markets and democracy in fostering capitalism. Their case rested on the rapid ascent of China in the global marketplace.
However, since 2022, China's economic juggernaut experienced a marked deceleration, where the country faced a disappointing year in its growth and various markets. While the initial catalyst may have been the lingering effects of the COVID-19 pandemic and China’s zero-Covid policy, which resulted in strict lockdown policies that severely disrupted activity in both industrial and service sectors, two other significant factors contributed to this economic downturn: a slowdown in the property sector and a reduction in export growth. This negative economic trajectory has defied earlier predictions made by Western policymakers and analysts who had, for decades, observed China's consistent annual growth rate averaging nine percent.
Economists have predicted a permanent slowdown in Chinese economic growth. In 2022, Goldman Sachs’ economic research team published a report indicating that China’s potential growth rate would be around 4% in 2023, stating that they ‘expect structural headwinds to reduce China’s potential growth rate meaningfully’. Since then, public sentiment on China’s economy has worsened. In August 2023, analysts at the Centre for Strategic and International Studies (CSIS) underscored that public discourse on China’s economy revolved around its ‘structural’ issues, particularly regarding unsustainable levels of government debt, its shrinking labour force, and deteriorating relationship with the West. Bloomberg Economics projects China’s growth to slow to near 1% by 2050.
While issues within the Chinese economy, such as COVID-19 policies, contracting the property market, and decreasing exports, have contributed to the slowdown, China’s government policy is the overarching factor behind the deceleration. Adam Posen, in ‘The End of China’s Economic Miracle’, published in Foreign Affairs, draws attention to Xi Jinping’s ‘pro-state interventionism’. He underscores Xi’s policy as the country’s primary source of weakness, despite earlier views that China’s autocratic economic model was, in fact successful. For instance, while infrastructure plays a role in a country’s economic growth, the Chinese government’s prioritization as a critical national interest undermined its future economic prospects. China’s investment in large-scale infrastructure projects led to massive debt and, by extension, resulted in an opportunity cost of education and health investment in rural China.
Xi’s government policy has culminated in a severe crisis of confidence, particularly within the private sector, where businesses and consumers have reacted negatively towards government intervention in economic matters. Scott Kennedy, Senior Adviser and Trustee Chair of CSIS, comments on the anxiety and distrust felt by company executives, investors, and consumers in major cities in China. He cites this anxiety as stemming from three critical areas of concern. First, the Chinese government mishandled the COVID-19 pandemic when Shanghai instituted a complete lockdown due to the sudden abandonment of the Zero Covid policy with incomplete planning. Second, the government’s ‘attack’ on the private sector. Many successful companies faced government nationalization, decreasing capitalist motivations for entrepreneurism and increasing fear that success under the economic system is not feasible. Finally, a significant concern regards worsening relations with economically developed Western nations and the possibility of war. These anxieties have correlated with increased savings and decreased investment levels. Infrastructure, manufacturing, and property investment are expected to diminish substantially due to reduced consumer confidence in the market, as opposed to a lack of funds.
China's economic slowdown holds far-reaching implications for the global economy. China’s decreased consumer demand and levels of manufacturing have affected trade in neighbouring Asian economies. Major exporters in East Asia were impacted by slower demand, resulting in manufacturing slumps and large windfalls in exports. South Korea, a linchpin of the region’s technology supply chain, saw the steepest decline in exports in the last three years, partly due to the decrease in exports of computer chips to China. This past July, factory activity in South Korea fell for the 14th consecutive month. Likewise, Japan and Taiwan saw decreases in exports and factory production.
Beyond exports and manufacturing, major trade and financial hubs in Asia are also at risk from a cooling Chinese economy. Countries like Singapore and Hong Kong heavily rely on Chinese demand, which accounts for a significant portion of GDP in both countries, 9% and 3%, respectively. The depreciation of the Yuan may also negatively impact currencies like the Singapore dollar and Thai baht.
The shifting economic landscape in China not only challenges established paradigms but also prompts a reassessment of the global economic order. China’s slow economic rebound reflects on global oil prices, and deflation within the country results in lower prices of exports. Thus, Western countries like the U.S. and the U.K., facing higher inflation levels, stand to benefit to some extent. Many academics posit that China’s weaker economic stance, and by extension, increased vulnerability, could push China to improve relations with the U.S. to ease the effects of U.S. trade restrictions on Chinese exports. In a recent discussion regarding China-Taiwan security threats, President Biden stated, ‘I don't think it's going to cause China to invade Taiwan - matter of fact, the opposite. China probably doesn't have the same capacity as it had before’, highlighting the limiting effect the nation’s economic problems could have on President Xi’s foreign policy playbook.
Image courtesy of Rodrigo Argenton via Wikimedia, ©2023. Some rights reserved.
The views and opinions expressed in this article are those of the author and do not necessarily reflect those of the wider St. Andrews Foreign Affairs Review team.
