Takshashila Discussion Document – Assessing the Latest Developments in the Chinese Economy

In the aftermath of the scrapping of the dynamic Zero-COVID policy in late 2022, it was expected that the Chinese economy would rebound and witness rapid growth on account of pent-up consumer demand, increased fiscal spending, and policy predictability vis-a-vis efforts to boost market confidence and signal openness.

However, despite a relatively positive Q1 performance in 2023, China’s economic data for H1 indicates systemic weaknesses.

There are persistent challenges with stimulating domestic demand, in addition to local government debt, property sector fragility, and declining foreign trade and investment.

This document compares data on the Chinese economy, and assesses projections surrounding the rebounding of the economy in the aftermath of the scrapping of the Zero-COVID policy. It further highlights the headwinds facing the economy in key areas such as domestic consumption, real estate, net exports, local government debt, and Foreign Direct Investment.

Some of the key judgements we draw are as follows:

• The pandemic years saw exports become the key driver of the Chinese economy. However, in a worsening external environment, particularly with major trading partners like the US and EU actively pursuing de-risking, external demand is likely to weaken further.

• Several factors are responsible for weak domestic consumption, such as rising unemployment, increased job insecurity, falling property values, a rising elderly population, etc.

• All of this impinges on the health of key developers, and thereby on the banking sector. Amid this, the Chinese government has followed a policy of tinkering with incentives at the margins without stepping in with a stimulus package.

• The fragility of China’s property sector also weighs on the broader economy owing to its linkages with local government debt. Local governments earn around 30 percent of their revenue from land sales. This income has been shrinking.

• Foreign direct investment into China expanded during the pandemic years. However, it appears that this trend is beginning to reverse.

• Finally, it is worth noting that increased Party-state intervention in the market remains one of the biggest challenges for the Chinese economy. Lending to the private sector has remained weak, and so has private investment, which has fallen 0.5 percent from January to July 2023 despite any encouragement in the aftermath of the scrapping of the Zero-COVID policy.

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