China’s economy: “The garbage era of history” – growth model ends in a dead end

Use of the phrase deserves Reprimands from state media in the summertime, nevertheless it capitalized on a deepening gloom sweeping Wall Street as latest data points to worsening weakness in key economic engines. Bank of America recently cut its growth forecast for 2024 to 4.8% from 5% and expects an extra slowdown to 4.5% over the subsequent two years.

In an article for the China Leadership Monitor Last weekend, Logan Wright, partner at Rhodium Group, said that while China continues to be growing faster than many other countries, its global influence is prone to have peaked in 2021.

At that point, it reached 18.3 percent of world GDP before falling to 16.9 percent in 2023. The US share is now around 25 percent.

The problem is just not just cyclical. Wright said: “The main reason China’s economic downturn is structural is one that Beijing recognizes: the credit and investment-led growth model has reached a dead end.”

All that capital went into constructing real estate and developing infrastructure. But nothing has replaced those as engines of growth, and China’s shaky economic system is unlikely to supply latest ones, he wrote.

Credit expansion will slow, which can slow investment growth and the economy’s long-term prospects, he said. At the identical time, political leaders’ fear of an increase in defaults, bankruptcies and unemployment is stopping the economic system from channelling capital into more productive sectors of the economy.

“The financial system itself is currently constraining China’s economic growth rather than supporting it,” Wright explained. “Along with demographics and the changing external environment, financial constraints are the main reason why China’s economic downturn is structural in nature and why China’s economy is likely to grow below its potential over the next decade.”

While Beijing knows its old growth model cannot last, it’s promoting advanced manufacturing in emerging sectors akin to electric vehicles and green energy as alternatives. But these will not be large enough to offset the decline in real estate and infrastructure construction, he says.

China’s leaders have also recognized the necessity to rebalance the economy to extend investment consumption, but that is complicated by income inequality, which requires an overhaul of fiscal policy to prioritize transfer payments that stimulate household spending.

Given these obstacles, consumption growth is prone to proceed to say no regularly, weighing on future economic growth, Wright predicted.

President Xi Jinping and other Chinese politicians may not yet fully grasp the gravity of the situation, because the official economic statistics they appear at appear increasingly dubious, while they seem determined to overtake the United States because the world’s largest economy.

But if Xi and Co. could change their worldview, it could help the Chinese economy, says Wright. Export-oriented growth, which relies on capturing global market share, results in trade barriers. A greater concentrate on domestic consumption, alternatively, could reduce trade conflicts.

Still, he is just not convinced that it is going to occur.

“The peak of the Chinese economy’s global influence also offers Beijing a new opportunity to realistically redefine its goals and become less confrontational with the economic and political interests of the rest of the world,” he said. “But we are under no illusions that such a redefinition is likely.”

The warning comes at a time when investors have also recently been spooked by warning signals concerning the Chinese economy.

PDD Holdings, the parent company of e-commerce giant Temu, surprised Wall Street last month with weak quarterly results and a warning that intense competition would dampen future profits. Shares fell greater than 30 percent, wiping $50 billion off PDD’s market value.

This was the newest warning sign that the world’s second-largest economy may very well be heading for a downward spiral because of overproduction and Beijing’s centrally planned economy.

“Put simply, in many key economic sectors, China is producing far more than it or foreign markets can sustainably absorb,” wrote Zongyuan Zoe Liu, a China expert on the Council on Foreign Relations, in Foreign Affairs magazine before the PDD announced its results. “This puts the Chinese economy at risk of falling into a vicious spiral of falling prices, bankruptcies, factory closures and ultimately job losses.”