According to China’s National Bureau of Statistics (NBS), the annual GDP growth of the country fell to 3 per cent much below the 5.5 per cent official target in 2022. This was also slightly lower than forecasts published by the IMF in October 2022. IMF predictions expected a GDP growth rate of around 4.4 percent. This marked a dramatic slowdown from 8.4 per cent in 2021. The NBS said, “despite the overall stable economic performance”, the foundation for economic recovery remains “unstable”. The annual GDP of the country stood at 121.02 trillion Yuan ( $17.94 trillion) in 2022. It declined from $18 trillion in 2021 mainly due to a sharp rise of the dollar against RMB. This is the slowest growth of the Chinese economy since the 2.3 per cent registered in GDP in 1974.
The effects of slowdown in the Chinese economy has the potential to generate ripple effects across the world. The concerns and challenges facing China and the global economy were well articulated by Liu He, Vice-Premier of the People’s Republic of China while speaking at the World Economic Forum at Davos 2023 – “Over the past five years, we have experienced all kinds of unexpected events, and witnessed profound changes in the world’s political and economic landscape. Therefore, the theme of this year’s Annual Meeting, “Cooperation in a Fragmented World”, cannot be more relevant.” The Covid-19 pandemic punctured China growth saga.
Observers were already talking about China falling into the middle income trap and now the evidences are coming that the country is finding it hard to keep its growth miracle of sustained higher growth rates anywhere closer to 10% or more recorded during the late 1980s and the whole of 1990’s. Kim Byung-yeon, author and a professor of economics and head of the Institute for Future Strategy at Seoul National University succinctly argued that “the Chinese economy is slipping into the middle-income-country trap.” and has explained the reasons for the same.
According to Kim, productivity that determines the long-term growth rate has sunken sharply in case of China. From 1978 to 2008, when the economy grew 10 percent on average a year, two thirds of its staggering growth was due to increased capital and labor and another one third to rising productivity. But the productivity that grew 3 to 4 percent annually fell below 1 percent from 2009. The downward trend has deepened since 2014. China’s fast growth over the past 15 years stemmed largely from the infrastructure investment to build factories, housing and roads – and less from structural reform and innovation. Extensive growth led by capital and labor input is not sustainable.
The sharp decline in the Chinese GDP growth in 2022 was blamed on a host of factors mainly China shutting itself from the outside world due to zero Covid policy. The slow pace was blamed mainly on the strictly implemented zero-Covid policy leading to periodic lockdowns and the ruling Communist Party’s crackdown on big industrial firms besides the lingering real estate crisis. The GDP growth in the fourth quarter was 2.9 per cent year-on-year, compared with 3.9 per cent in the third quarter as it was hit hard by recurring Covid lockdowns of various urban centres, including the top industrial and business hubs like Shanghai.
The most disturbing fact that comes out from the NBS data is that China, the so called “manufacturing hub” of the world recorded a very feeble growth in industrial output at 3.6 per cent year-on-year in 2022 and even feebler at 1.3 per cent in the month of December. Zhu Hong, a senior NBS statistician, highlighted a rebound in COVID outbreaks and lackluster demand in November that curbed industrial production and placed increasing pressure on Chinese businesses. According to him, the factors that weighed on slow industrial growth included a squeeze in profits both from anti-virus curbs in big manufacturing hubs such as Guangzhou and Zhengzhou, and from the persistent weight of a protracted property crisis and slowing exports.
NBS data in November 22 showed that profits fell for 21 of 41 major industrial sectors, with the ferrous metals smelting and pressing industry suffering the steepest decline, at 94.5%. That compares with a 92.7% fall for the first 10 months. A Chinese slowdown can impact global trade in all these products. However, it may give some respite the world economies from sky-rocketing inflation. China is also a significant consumer of commodities ranging from petroleum products to iron ore and copper. A slowing Chinese economy can thus cool global inflation.
Another reason of industrial slow down is that many Chinese companies are also facing western sanctions including those in the US, especially against the Chinese tech companies which allegedly breach data security and steal patents. FBI Director Christopher Wray said in the World Economic Forum (WEF) that he was “deeply concerned” about the Chinese government’s artificial intelligence program, asserting that it was “not constrained by the rule of law.” He said Beijing’s AI ambitions were “built on top of massive troves of intellectual property and sensitive data that they’ve stolen over the years.” He added that left unchecked, China could use artificial intelligence advancements to further its hacking operations, intellectual property theft and repression of dissidents inside the country and beyond.
Notwithstanding slackening of growth in 2022, the NBS data also showed some silver linings in the Chinese economy. China’s fixed-asset investment went up 5.1 per cent in 2022. The data showed that China’s job market remained generally stable in 2022. Also A total of 12.06 million new urban jobs were created last year, exceeding the annual target of 11 million. A total of 12.06 million new urban jobs were created last year, exceeding the annual target of 11 million. Also China was able to contain the Consumer Price Index (CPI) within two per cent while maintaining a current account surplus slightly above two percent of GDP.
Even then, Chinese policy makers and particularly the Communist Party of China’s barons are very concerned from the latest trend of data because the legitimacy of the CPC and its authoritarian policies generally draw support from the people of China on their economic performance. Unfortunately public support might wane if China fails to reverse the present trends.
The NBS report, therefore, has claimed that the country will comprehensively deepen reform and opening-up and focus on strengthening market confidence to promote improvements of the economy to revive the economy. However, Kang YI the Chief of the NBS has pointed out that the foundation of domestic economic recovery is not solid as the international situation is still complicated and severe while the domestic triple pressure of demand contraction, supply shock and weakening expectations is still looming. “China will make economic stability its top priority and pursue progress while ensuring stability this year”, he said.
The Managing director of the International Monetary Fund, Kristalina Georgieva, this month asked China to continue reopening its economy.”What is most important is for China to stay the course, not to back off from that reopening,” Kristalina Georgieva said. Liu He also said at Davos 2023, “Opening-up, as a basic state policy, is a catalyst of reform and development, and a key driver of economic progress in China. China’s door to the outside will only open wider.”
China’s economic reopening might boost global growth, but the business leaders and policymakers at the World Economic Forum indicated the need for a cautious approach to remain alert about its potential inflationary impact as demand for commodities and energy increase.
Talking about China’s strategy in 2023 to once again buoy economic growth Liu He noted, “In 2023, we will continue to try to make progress while maintaining stability, and follow a proactive fiscal policy and a prudent monetary policy. We will strive to maintain reasonable economic growth, and keep prices and jobs stable. More focus will be placed on expanding domestic demand, keeping supply chains stable, supporting the private sector, reforming the state-owned enterprises (SOEs), attracting foreign investment, and preventing economic and financial risks.”
JP Morgan analysts view China’s domestic reopening, which came earlier and faster than expected, would mean a shorter period of transitional pain in the first quarter of 2023, followed by an above-trend sustained recovery from the second quarter.
How would China break the middle income trap which is looming large since the last decade? How will the Chinese economy affect the international order and geopolitics? Kim Byung-yeon talkes about various scenarios and tradeoffs – “If the Xi government carries out policy to deleverage debt at the expense of slower growth, external policy could turn farsighted. Beijing would likely avoid stoking risks for at least a few years and concentrate on building economic resilience. But if China gives up on debt reduction and instead attempts to accelerate growth through stimuli measures, it could be implying restlessness. Then, external policy could be short-targeted.”
Kim concludes, “Without political reform, China won’t be able to shake out of the middle-income country trap. China has arrived at a point where politics and economy are clashing. The global community will be affected by unpredictable China. Anxiety prevails over hope in the new year.”