When China finally eased the last of its zero-Covid restrictions in early 2023, optimism was high that a strong rebound in growth and activity in the world’s second-largest economy would help to pull the rest of the world out of the economic doldrums.
After all, this was the role that China had played during the global financial crisis, when it unveiled the world’s largest stimulus package in late 2008.
China’s economy grew 8.7 per cent in 2009 and 10.4 per cent in 2010, while the surge in demand for commodities in the country supported the recovery in commodity exporters and was a key factor in Australia avoiding a recession completely.
But the years after the global financial crisis may have sown the seeds for the current crisis in China’s property sector, and the seeming unwillingness of the authorities to provide more stimulus to boost growth after the pandemic.
Consequently, after an initial rebound in the first quarter of 2023, growth has slowed as consumers and private sector businesses lack the confidence to significantly boost consumption and investment.
Bloomberg reported that consumers travelled and spent less than expected over the Golden Week holiday, even though the data was much better than in 2022 when many Covid-19 restrictions were still in place.
Home sales over the key holiday period also declined from last year, despite measures announced to support demand in recent weeks.
While analysts expect more support measures and stimulus for the property sector and the broader economy in the coming quarters, its scale is unlikely to match what was seen immediately after the financial crisis, or even in 2016-2017, for several reasons.
In the first instance, the fiscal room for stimulus is more limited now than it was a decade ago.
Government debt stands at more than 50 per cent of gross domestic product compared to less than 17 per cent in 2008.
The authorities have also prioritised the development of strategic sectors and industries such as technology, renewable energy and electric vehicles, among others, over direct support for consumers.
Households are also significantly more indebted than they were 15 years ago, with property accounting for almost three-quarters of household liabilities and almost 60 per cent of household wealth.
Developments in the beleaguered property sector have thus had a very real impact on household finances and consumer confidence, probably affecting consumption.
In addition to the short-term challenges weighing on China’s economy, there are longer-term structural factors at play that may make a return to double-digit growth rates unlikely.
There have been changes to China’s strict one-child policy – as recently as July 2021, families have been allowed to have up to three children, but these measures will not have any impact in the near to medium-term.
An ageing population brings with it issues of labour productivity, with a smaller working age required to produce the same output.
This smaller cohort of working age people may make it more difficult for firms to fill roles, which can cause declines in productivity, upward pressure on wages and a deterioration in international competitiveness.
An ageing population also puts pressure on the fiscal balance, with a larger share of the population drawing on pensions and using healthcare services.
Slower growth in China over the longer term will have implications for other parts of the world, given its size.
Weaker demand for commodities (including oil) may affect prices for those commodities and growth in commodity exporters.
China is also a key destination market for exports from many countries including South Korea, Japan, Australia and Germany.
Weaker demand in China has been a factor in the contraction in the German manufacturing sector this year.
In the absence of a more substantial stimulus programme to boost household and business confidence in China, the repairing of balance sheets and recovery in consumption and investment may take some time.
While an outright recession is not on the cards, growth in China is likely to remain much lower than the 10 per cent averaged between 2000 and 2010.
Khatija Haque is chief economist and head of research at Emirates NBD