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The condition of China, once a powerhouse showcasing dominance globally, is deteriorating. Unemployment is rapidly increasing, industries are shutting down, and the country is grappling with economic recession. The momentum of China’s economy has come to a halt. Currently, even foreign investors are swiftly withdrawing their money from China.
For the first time in 25 years, direct foreign investment in China has turned negative. According to the figures, the liabilities for direct investment were minus 11.8 billion dollars in the third quarter, compared to 14.1 billion dollars at the same time last year. The state of real estate companies in China is poor, leading foreign investors to turn away from the country.
Unemployment in China has reached record levels. According to reports, the unemployment rate for individuals aged 16 to 24 in China was 21.3 per cent in the past months. This is the highest rate since 2018, based on data. The unemployment rate in China is consistently on the rise.
As the Year of the Dragon approaches in less than two weeks, China’s economic challenges resurfaced on Monday. A Hong Kong court ordered the winding-up of Evergrande, the world’s most indebted real estate developer, symbolising the ongoing property crisis in the country. Justice Linda Chan emphasised that “enough is enough,” citing Evergrande’s failure to present a viable restructuring plan for its staggering 300 billion dollar debt. Liquidators are set to take control of the company’s assets, but analysts warn that offshore investors may face challenges in reclaiming their funds.
Recovering money may prove difficult as Beijing aims to prevent reigniting a debt-driven property bubble that has brought several companies, including Evergrande’s rivals like Country Garden, to the brink of collapse.
Addressing the property market crisis is just one of the economic challenges Chinese policymakers will grapple with in 2024. Several other reasons contribute to the anticipation of a challenging year for China’s economy.
Fragile growth
In late 2022, China’s Communist Party decided to phase out its stringent zero-COVID measures, anticipating an economic rebound post-lockdown. However, the actual economic recovery has fallen short of many forecasts. Official figures for the previous year indicate a 5.2 per cent expansion, slightly surpassing Beijing’s 5 per cent target. Despite this, economists express skepticism about a repeat performance in 2024 unless policymakers implement stimulus measures.
The World Bank highlighted the fragility of the recovery, stating that although economic activity in China picked up in 2023, it remains delicate. A notable manifestation of the slowdown is the weakened consumer demand, adversely affecting American companies like Apple. The tech giant faced disappointing sales of the iPhone 15 in China as consumers scaled back on significant purchases. This signals broader challenges in sustaining economic momentum, pointing to the potential necessity for proactive policy interventions to bolster growth in the coming years.
China has a debt of 782 trillion rupees in around 31 provinces. The real estate company Country Garden in China has incurred losses of billions of dollars. While major global companies have heavily invested in China, reaping benefits, the impact of China’s struggling economy is now affecting them as well.
Deflation
Adding to China’s economic challenges, plummeting prices have become a significant concern. The consumer price index inflation gauge entered negative territory in October and has sustained a downward trend in the subsequent months, as indicated by official data.
While deflation might initially appear beneficial to those in the West accustomed to grappling with rising living costs, it poses a serious threat to economic growth. The negative inflation environment prompts consumers to delay purchases in anticipation of further price declines, setting off a detrimental cycle that hampers overall economic expansion. This scenario echoes Japan’s economic struggles in the 1990s and 2000s when the country faced an extended period of stagnation marked by similar deflationary pressures. China’s current predicament reflects the potential risks and challenges associated with deflation, highlighting the need for effective economic strategies to break free from the grip of this destabilising cycle.
While countries around the world are grappling with rising inflation, China is experiencing deflation. Prices of goods in China are decreasing, diminishing people’s purchasing power. Chinese companies are facing destruction. While central banks worldwide are increasing interest rates, China is cutting rates.
Weak foreign investment
In a noteworthy turn of events, Premier Li Qiang underscored China’s dedication to openness last year, coinciding with prominent visits from US climate envoy John Kerry, Treasury Secretary Janet Yellen, and Tesla CEO Elon Musk to the nation. Despite the high-profile engagements, a fundamental concern drives this call for foreign investment: a stark decline in overseas investment.
During the third quarter, China registered its first foreign direct investment (FDI) deficit, indicative of a shift as Western companies and nations retract their financial commitments. This reversal in FDI trends signals a challenging landscape for China as the appeal for foreign capital diminishes. The conspicuous downturn in overseas investments raises questions about the factors contributing to this shift, potentially affecting the country’s economic outlook and its ability to sustain international interest in its markets. The plea to “come and invest here” reflects a response to the drying up of overseas investment and a recognition of the urgent need to rekindle economic engagement with global partners.
Now, foreign companies are distancing themselves from China. These companies are actively seeking new locations. Meanwhile, the condition of Chinese companies is deteriorating day by day. Companies are going bankrupt. Several rating agencies have expressed concerns about China’s economic growth.
Economists have blamed Xi Jinping’s iron fist for those declines.
Economic analysts attribute the declines in Chinese stocks to Xi Jinping’s authoritative governance. The president’s conspicuous power consolidation during the 2022 Communist Party conference, marked by the installation of a leadership team comprising political allies and a public display of disregard for his business-oriented predecessor, has been a key factor. Notably, the Government, under Jinping’s leadership, implemented restrictive measures, such as the ban on US semiconductor maker Micron’s chips, the intrusion of state police into the Shanghai offices of American consulting giant Bain & Co., and a continued crackdown on domestic Big Tech firms.
These actions suggest a departure from a commitment to a free-market approach. Consequently, China is anticipated to face ongoing challenges in attracting increased foreign investment throughout 2024. Jinping’s centralisation of power and the subsequent regulatory moves have created an environment that appears less conducive to the principles of a free-market economy, potentially hindering the country’s appeal to global investors.
Countries globally are contending with surging inflation, yet China finds itself in the grip of deflation. The cost of goods in China is on a decline, eroding people’s purchasing power. Chinese companies are confronting the threat of collapse. In contrast to central banks worldwide raising interest rates, China is opting to cut rates.
Stock-market slump
In recent days, there was a conference of investors in Hong Kong, where approximately 40 per cent of participants stated that China’s shares are ‘uninvestable.’ The reality is that China’s stock markets have been struggling for the past three years. After reaching its peak in February 2021, the Hang Seng Index in Hong Kong has dropped nearly 50 per cent by January 2024, approaching levels last seen in 1997. During this period, the Shanghai Composite Index has experienced a roughly 25% decline. The valuation of the Chinese market has decreased by almost 6 trillion dollars in these three years, equivalent to about three-quarters of China’s GDP. The market capitalisation of listed shares on the Hong Kong Exchange has plummeted from 7.5 trillion dollars to 3.59 trillion dollars, a 52 per cent decrease.
In the throes of a challenging economic landscape, Chinese stocks are grappling with significant declines. Hong Kong’s Hang Seng index, in particular, has borne the brunt of an 8 per cent slump, trading perilously close to its lowest point since 2009. Simultaneously, the benchmark CSI 300 has already experienced a 5 per cent downturn, signalling broader market concerns.
Investor unease is palpable, driven by apprehensions surrounding the overall economic well-being and particular anxiety about Chinese tech firms falling behind their American counterparts in the realm of artificial intelligence development. This tech lag is amplifying the market’s downward trajectory.
In response to the crisis, reports indicate that policymakers are considering unconventional interventions to arrest the decline. However, skepticism looms over the efficacy of these measures, given the unprecedented challenges faced by the market. The severity of the downturn is underscored by a staggering 6 trillion dollar erosion in shareholder value over the past three years, raising doubts about the feasibility of a swift and complete reversal. The path to recovery appears intricate and uncertain, adding complexity to the efforts to restore confidence and stability in the Chinese stock market.
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