Economic sentiment in China is in the doldrums. The abrupt Covid policy U-turn and the reopening of the economy in late 2022 led only to a brief pickup in economic activity. Stock prices fell sharply in 2023 and difficulties in the property market have reverberated through the economy. While 2024 may be less bumpy for the economy than 2023, real GDP growth is expected to be lower.
In the past, extensive infrastructure spending - building bridges and roads for which there is little demand - boosted the property market and allowed local governments to sell land at high prices. In response, the private sector took on too much leverage. That cycle has now ended but lingering problems persist relating to prior overinvestment in physical infrastructure and housing.
Despite these problems, in our view the Chinese economy is unlikely to experience a severe downturn. The authorities have many policy levers and, if the economic problems lead to public protests, many commentators believe that the Communist Party would change policy rapidly. Indeed, the avoidance of street protests is seen as a key policy objective.
Politics and the economy
The domestic economic problems are sometimes attributed to a shift away from a market system. Policymakers appear concerned that the free market and the continued growth of the private sector may erode the power of the Communist Party. Moreover, avoiding an increase in inequality and the associated risk of social instability that it could bring is also a key policy objective. China is seen as having difficulty handling social instability because of the lack of a fully democratic system to absorb shocks.
In practice, this shift in the focus of policy has meant that policymaking has been centralised and national security has been prioritised at the cost of economic objectives. Power has shifted away from officials and experts to politicians close to the centre of power with the result that policy institutions, including the People’s Bank of China, have lost influence and independence. While officials are said to have a good understanding of the economic problems and possible solutions, they appear unable to get their views across to the highest political leadership.
As a result, there is a widely held view that current economic policies are not sustainable, but also that the authorities would not hesitate to modify their objectives, even dramatically, if that became necessary to avoid widespread social unrest.
Download the full publication here.