Global Agenda

Beijing’s Reality Check: China’s economic slowdown and the end of Invincibility

Raul Bertoldini

China has officially fallen into deflation, with July’s consumer prices index falling by 0.3% compared with 2022, and the producer prices index fell by 4.4%. It is the first time that both figures have been negative since the Covid-19 peak in November 2020. This is indeed big news, as the Asian country had been seen for long as unstoppable and on its way to toppling the US as the world’s largest economy quickly. Depending on the perspective adopted and the experts’ opinions, the coverage of this news has acquired more or less catastrophist character, with different views on the actual weight and long-term relevance of this crisis. Irrespective of the country’s recovery trajectory, the recent events have significantly reshaped the world’s perception of the People’s Republic. The shifts happen within a larger, multifaceted geopolitical and geoeconomic landscape, affecting decision-making in capitals around the world.

Zeroing in on the crisis’s internal aspects, many elements are involved in this deceleration. A major red flag is the wavering real estate sector. Despite previous signs of a bubble, this sector remains a colossal part of China’s GDP, accounting for 20-30% of it, depending on the analysis. Its vulnerability is already proving relevant and could ripple across the country’s economic canvas. Another glaring concern is the soaring youth unemployment rate, now eclipsing 21%. While the overall unemployment metrics appear stable, this youth statistic is cause for alarm. It hints at underlying challenges within the nation’s advanced economic echelons, with a shortage of high-skilled high-payed jobs, youngsters forced to look into less rewarding options,  and analyses drawing unsettling parallels to Silicon Valley’s turbulence following notable IT setbacks there. China’s COVID-19 response, marked by strict measures, has also reverberated within international business corridors. Several multinational corporations such as Apple, Samsung or Hasbro, sensing a possible risk concentration, are recalibrating their investment strategies. This translates to a broader rethink about their heavy reliance on Beijing, prompting a look at diversifying supply chains and exploring alternative economic hubs.

Moving away from the domestic market and from international investments to exports, the country’s strategic positioning within the global supply chains appears to have taken even further hits lately. One of China’s main trade partners, Germany, is going through turbulent economic times lately as well, facing a recession and incoming budget cuts. Furthermore, in a historical shift in the relationship between the two countries, in its recently published security strategy, Berlin has, for the first time, adopted a clear and assertive anti-Chinese stance, describing Bejing as a systemic rival. Staying in Europe, Italy’s relationship trajectory with China is equally intriguing. In a controversial decision, in 2019, Rome chose to sign a memorandum of understanding connected to the Belt and Road initiative, becoming the biggest economy in the world to partner with the significant and global-scale Chinese infrastructural project. In recent weeks, however, under Giorgia Meloni’s leadership, the country has been mulling a strategic pivot, underscored by discussions with the U.S. establishment in recent weeks. Both in the German and Italian cases, such realignments indicate broader European recalibrations vis-à-vis China.

Despite all this, China’s government, known for its strategic interventions within the economy, currently exhibits restraint. However, bolder steps may be required if current trends continue and results deviate substantially from established targets. Notably, the public debt of several national authorities has risen significantly, showing the limits of a purely public-spending-oriented approach. Beijing’s money and short-term solutions also might not be enough this time to fix the changes in the perception of the country that happened on the global stage. Not only are some of the long-known weaknesses of the Chinese system finally coming to show, but the country is also presenting some dynamics that so far had been more predominant in the rivalling and long-time criticised United States. Additionally, the foreign policy dimension is also critical. As internal economic pressures mount, there’s an apprehension that China might adopt a more assertive stance in its foreign policy. This could escalate tensions in sensitive regions, notably the South China Sea and the Taiwan Strait, potentially upping the ante for geopolitical confrontations.

In conclusion, China’s economic dilemmas have magnified global scrutiny of its economic stability and diplomatic clout. As domestic issues like the real estate downturn and youth unemployment exacerbate, and global dynamics evolve, the ramifications could influence China’s trajectory and broader geopolitics. The forthcoming months and years will determine China’s ability to mitigate this slowdown and retain its international economic stature.

Photo credit:

Creator: Stefano Borghi 

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