This is the first in a three-part series delving into the unprecedented challenges China is facing on its road to economic recovery, from inexperience in dealing with such crises to the compounding implications of internal demographic shifts and external trade hurdles.
The topsy-turvy roller-coaster ride that has seen China’s economy teetering on the rails for the past four years has left Zack Yao clinging to whatever business he can muster while struggling to determine when the wild ride will end.
At 37 years old, the seller of electric power tools in the eastern province of Zhejiang has never experienced anything like the series of ups and downs that accompanied China’s pandemic years and subsequent attempts to return to economic normality.
“I can still feel the sting every time I recall what I went through,” he said. “The memories are fresh.”
He hearkened back to when “everything ground to a halt in early 2020”, leaving him with no revenue for months, followed by a gradual resumption in economic activities and fluctuating earnings as snap lockdowns were imposed under China’s adherence to a zero-Covid policy. These included lockdowns from March to June 2022 in Shanghai, which borders Zhejiang to the south.
After restrictive pandemic policies were lifted later that year, glimmering hope appeared at the end of the tumultuous tunnel.
“I was overwhelmed by a sudden spike in orders in the second quarter of 2023 after China opened up and the city I live in launched new projects,” he said. “I rushed to rent a new warehouse and hire more shop assistants.”
But to his dismay, gleaned hope warped into a mirage. The business pickup was short-lived, and the woeful ride resumed.
By the end of last year, his sales had plunged back to those dismal 2020 levels as China’s economic malaise took its enduring toll. Yao had little choice but to slash costs where he could, including letting staff go. Still, his combined losses over the past four years, he says, equate to his total earnings in the five years before Covid.
“What keeps me up at night is I have no idea when the losses are going to end,” he lamented.
Yao’s experience is far from unique. He is among the countless Chinese residents feeling the pinch of a prolonged downturn. The national economy is facing its sternest test in decades, and the leadership hierarchy in Beijing, while steadfastly determined to press on with an economic transition, has never faced a spiral of such magnitude.
Analysts point out that policymakers have no playbook for what has transpired in China, nor does the general public have a comparable frame of reference.
Meanwhile, the growth of China’s gross domestic product is a constant cause of concern. Amid efforts to avoid stagnation, employment and consumer confidence have not fared well. It is estimated that for every single percentage point of GDP growth in China, about 2 million jobs can be created.
The youth-unemployment rate, comprising people aged 16 to 24 but excluding college students as of July last year, has been particularly bleak. It reached a post-adjustment high of 18.8 per cent in August – putting nearly one in five young people of employment age out of work.
Also weighing on household and business confidence is the sluggish growth in China’s consumer price index – a measure for inflation that has long hovered around 1 per cent, amplifying deflationary pressures.
Meanwhile, shrinking balance sheets across the country were underscored by a contraction of new yuan loans to companies and households in July – the first such contraction in 19 years.
“I’ve never seen anything like this in my 30-year career,” Li Xunlei, chief economist of Zhongtai Securities, said at an investor conference in September.
“For years, the property market has been plunging – in search of a bottom – with the stock market stuck in bear territory,” added Li, famed for macroeconomic research.
The current crisis is different from the previous storms that China had weathered – namely the high inflation seen in the 1980s, the 1997 Asian financial crisis and the 2008 global financial tsunami – in terms of duration, scale and magnitude, as well as the root cause, according to analysts.
Beijing’s swift and resolute actions in the past proved effective in tackling those challenges, but now the unprecedented extended downturn may require a combination of decisive actions, protocols and systematic mechanisms, the pundits have concluded.
“The challenges are on a greater scale today than before, given the weight on the economy created by the property sector and the local government debt burden,” said James Zimmerman, a partner at international law firm Perkins Coie.
“In prior crises, most of the issues were external. Today, the challenges are mainly coming from within,” added Zimmerman, also a former chair of the American Chamber of Commerce in China.
Zhou Zheng, a senior analyst with Zurich-headquartered consultancy China Macro Group, echoed that sentiment in noting how the current challenges are unlike any that have come before.
“Beijing has had its shortcomings and some of its promises have not been successfully delivered,” Zhou said, pointing to the leadership’s inexperience in dealing with such calamities.
At the end of the 1980s, pro-market pricing liberalisation, economic overheating, a boom in fixed-asset investment and unchecked monetary supply set inflation alight, and the consumer price index soared 18.8 per cent between 1987 and 1989.
As bank runs and panic buying started to spread, Beijing rushed to slam the brakes on credit supply and axed thousands of infrastructure projects nationwide to arrest surging prices. In a first, the central bank also pledged inflation protections for depositors.
Those measures paid off in the short term, as inflation was defused in 1990, saving the national economy from catastrophe as Beijing pivoted to rekindle sentiment in the aftermath of the Tiananmen Square crackdown in 1989.
A few years later, amid the 1997 Asian financial crisis, Beijing promptly launched countercyclical measures and eased fiscal policies to support domestic demand to compensate for slumping exports when its neighbours were embroiled in a financial contagion.
Beijing elevated reforms of the financial sector and state-owned enterprises to the top of its agenda. The People’s Bank of China lowered interest rates by half between 1997 and 1999 but withstood the yuan’s depreciation pressure.
In around a year, Beijing’s measures helped China emerge from the crisis largely unscathed.
Then, in 2008, when the world was engulfed in a financial tsunami, Beijing raced to get ahead of the fallout by unveiling a 4-trillion-yuan stimulus just two months after Western financial markets began to melt down.
Leadership abandoned earlier aspirations to prevent overheating and inflation, fiscal policies became expansionary, and the budget-deficit ceiling was raised with more government bond issuances.
The central bank also trimmed interest rates and reserve-requirement ratios to prop up the battered economy.
“This combination of stimulus and lower rates helped spark a pickup in growth by the second quarter of 2009,” praised the International Monetary Fund in a 2010 report.
However, while that swift action helped mitigate the impact of shock waves from abroad, it left China facing an enormous debt crisis, particularly among local governments and state-owned enterprises.
This time around, Beijing has been much more reserved in its stimulus efforts. A political scientist at Peking University said that, until the stimulus announcement in late September, Beijing spent more than a year beating around the bush amid rising calls to do more for an economy in crisis.
“The [response] slowness was indicative of its inexperience and cluelessness in tackling something as big as this,” said the scholar, who declined to be named as he was not authorised to speak to non-state media.
Comparisons have also been made between how Beijing has handled the unprecedented challenges and America and Japan’s experiences and lessons.
Li Xuenan, a finance professor at the Cheung Kong Graduate School of Business, said that the United States, which is no stranger to economic upheavals, has a mature response mechanism.
“The US has a well-oiled response process formed through losses, experiences and hard-fought lessons as it staggered from one crisis to the next – including the Great Depression,” Li said.
The Great Depression, the first mammoth downturn that the US grappled with, in the 1920s and ’30s, marked the establishment of some institutions and policies that have helped the country tide over subsequent crises.
Washington broke with norms and doctrinaire economic theories under President Franklin Roosevelt’s New Deal between 1933 and 1938 to salvage the US economy.
Roosevelt fired on all cylinders with proactive monetary policies for the Fed to pump liquidity into the market and scrap the gold standard that allowed the depreciation of the US dollar to stave off deflation. Expansionary fiscal policies also worked in unison, with more government spending and subsidies to households that proved conducive to economic recovery.
The US’ policy regime and transmission mechanism, including rate adjustments, have thus been formed in the past century. “Today, the Fed’s rate cuts, for instance, can have almost instantaneous effects. This is the envy of many central banks,” Li said.
“In contrast, Beijing still needs to accumulate experience and grow contingency-planning capabilities, and it needs a smooth transmission mechanism to cope with current and future events,” she added.
What is afflicting China also bears striking similarities to Japan’s economic difficulties in past decades.
“China’s ongoing hardship is acute and may be around for much longer than many may think, as we look at Japan’s protracted recession and dissect its lessons,” said the PKU scholar.
Richard Koo, chief economist at the Nomura Research Institute, told the Post in May that, for China to prevail over these deep woes that also bedevilled Japan for years, it needs experience in building resilient economic and societal foundations – something China is still lacking.
“If GDP stays the same and your social structure remains intact and people help each other, then [recession] won’t be so bad” as it was in Japan, Koo said. “If the social structure and bond aren’t so strong in China, and things start falling apart, it could get much uglier.”
The raft of stimulus policies that Chinese authorities fired off last month included mortgage rate cuts and new tools to boost the stock market. President Xi Jinping also issued a rallying call to Chinese officials in a bid to prevent property from further slumping, and to stabilise growth, marking leadership’s most forcible pivot since the pandemic.
However, economists and observers said it may take time to restore confidence among consumers and businesses to the point that it ultimately revives the whole economy.
One lingering question is whether the shift represents a strategic policy pivot or merely a short-term tactical move.
“Many of the initiatives launched last month are things that economists have [wanted] for years, together with more fundamental reforms that have yet to be initiated,” said Zimmerman at Perkins Coie.
“New stimulus measures are just a tactic. Without a strategy for restoring investor and consumer confidence, it’s all for naught.”
But Zhou at China Macro Group said a strategic transition is still under way, albeit slowly.
“There was already the pain from an economy in transition since the 2010s, which Beijing deemed necessary to upgrade industries. Had it not been for the trade war and Covid, the transition and upgrades could have borne enough fruit to put the Chinese economy in a far better shape than it is now,” he stressed.
“The transition, though slowed and more painful, is still ongoing.”
Professor Li at Cheung Kong also deemed September’s stimulus tactical, but stressed that Beijing has never lost sight of a strategic transition.
“Last month’s stimulus serves as more of a confidence boost,” she explained. “Beijing will not rely only on monetary-policy tweaks nor the stock market to reboot the economy. The real deal is always [China’s] economic transformation and tech innovation.”