China's Economy Faces Troubling Prospects for 2024

Don't miss out on CNN's Meanwhile in China newsletter, providing insights on the country's rise and its global impact. Despite expectations for rapid recovery in 2023, the Chinese economy has stalled, leading to concerns that it is now a "drag" on global output according to the International Monetary Fund (IMF) and others.

Despite facing issues such as a property crisis, low spending, and high youth unemployment, most economists believe that the world's second-largest economy will reach its official growth target of approximately 5% this year. However, this is still lower than the 6% or more annual growth seen in the decade prior to the Covid pandemic, and there are concerns about the outlook for 2024. Some experts are warning that the country may be on the brink of decades of economic stagnation.

Derek Scissors, a senior fellow at the American Enterprise Institute, asserts that the 2024 challenge for the Chinese economy is not GDP growth, which is projected to exceed 4.5%. Instead, the challenge lies in the potential for economic decline, as without significant market reforms, China may become trapped in what economists refer to as "the Middle Income Trap." This concept suggests that emerging economies experience rapid growth out of poverty, only to become stagnant before reaching high-income status.

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The stakes are too high to let Evergrande fail. Here's why (2021)

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This June 20, 2023 photograph captures an unfinished apartment complex in Xinzheng City, located in Zhengzhou, China's central Henan province. The country's real estate industry experienced rapid growth starting from the late 90s, playing a significant role in China's robust economic expansion. However, as growth slowed and debts accumulated, authorities tightened access to easy loans in 2020, dealing a severe blow to the sector and resulting in a historic downturn last year. In the summer, a nationwide wave of mortgage boycotts emerged as financially strained developers struggled to raise enough funds to complete homes that had already been pre-sold, a common practice in China. (Photo by Pedro PARDO / AFP) (Photo by PEDRO PARDO/AFP via Getty Images)

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The aerial photo, taken on September 28, 2023, captures a housing complex in Wuhan, China's central Hubei province, developed by the Chinese property developer Evergrande. This image is courtesy of AFP/STR and is circulating as part of China OUT. (Photo by STR/AFP via Getty Images)

Since China re-opened to the world in 1978, it has been one of the fastest-growing major economies on Earth. Between 1991 and 2011, it experienced an annual growth rate of 10.5%. After 2012, under President Xi Jinping's leadership, the expansion slowed but still maintained an average of 6.7% in the decade leading up to 2021.

According to Scissors, the growth is expected to slow in the second half of the 2020s due to a correction in the real estate sector and demographic decline.

The IMF has revised its outlook for the longer term as well, predicting in November that China's growth rate would hit 5.4% in 2023, then gradually drop to 3.5% in 2028 due to various challenges such as low productivity and an aging population.

A woman selects clothes at a shopping mall in Beijing on June 15, 2023.

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Cargo ships are preparing to dock for loading and unloading containers at a container terminal in Lianyungang, Jiangsu province, China, on December 6, 2023.

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What has changed?

The Chinese economy is facing numerous challenges, and this situation did not happen suddenly. According to Scissors, President Hu Jintao's previous administration injected liquidity into the economy in 2009 to stimulate growth during the global financial crisis. However, Xis government, which took power in 2012, hesitated to control borrowing, leading to the accumulation of structural issues.

Logan Wright, Rhodium Group's director of China market research, concurs, stating, "The deceleration in China's economy is structural, stemming from the culmination of an unparalleled surge in credit and investment over the last ten years." Wright further notes that the country's financial system will not be capable of sustaining the same rate of credit expansion as in the past, resulting in Beijing having significantly less influence over its economy than before.

Beijing's rigid commitment to a zero-Covid policy and strict lockdowns, along with its crackdown on private enterprise, exacerbated the situation and negatively impacted confidence and the economy's most dynamic sector. As a result, this year has seen a slowdown, with consumer prices remaining weak due to sluggish demand, and the looming threat of a deflationary spiral.

The real estate crisis has intensified, with plummeting home sales pushing even healthy developers like Country Garden to the verge of collapse. This crisis has also impacted the shadow banking sector, resulting in defaults and protests nationwide.

As a result of three years of Covid spending and declining land sales, local governments are now grappling with financial challenges. Some cities are unable to repay their debts, leading to cuts in basic services and reductions in medical benefits for seniors.

This photo taken on August 20, 2020 shows people looking at job postings at a job fair in Congjiang, in China's southwest Guizhou province.

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Graduates and young people in Yibin, China, attend a job fair on June 14, 2023. The National Bureau of Statistics reported a record 20.8 percent unemployment rate among Chinese youths in May, as the economy's post-Covid growth slows. (Photo by CNS / AFP) / China OUT (Photo by -/CNS/AFP via Getty Images)

The government has ceased publishing data due to the severity of youth unemployment. Beijing's increasing scrutiny has made foreign companies hesitant, leading to a negative foreign direct investment (FDI) in China for the first time since 1998 in the third quarter.

Will China become Japan?

According to a recent survey conducted by the American Chamber of Commerce in Shanghai in September, only 52% of respondents expressed optimism regarding their five-year business outlook, marking the lowest level since the survey's inception in 1999.

With China's slowing growth, some economists are comparing the situation to Japan, which faced two "lost decades" of stagnant growth and deflation after the burst of its real estate bubble in the early 1990s. However, Scissors believes that this outcome is not imminent, at least for now.

"The rest of the 2020s will not resemble a lost decade, with Chinese GDP growth projected to remain well above zero," he stated. However, the most significant long-term economic concern may be demography. China's population dropped to 1.411 billion last year, its first decrease since 1961.

Its total fertility rate, the average number of babies a woman will have over her lifetime, also declined to a historic low of 1.09 last year from 1.30 just two years prior. This means that China's fertility rate is now lower than Japan's, a country long known for its aging society.

A nurse cares for a newborn at the Women and Children's Hospital in Fuyang City, Anhui province, on August 8, 2022.

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The impact of demographics on the growth potential of an economy can be substantial. If the labor supply decreases and spending on healthcare and social services increases, it could lead to a larger fiscal deficit and increased debt. A smaller workforce may also lead to a decrease in savings, which could result in higher interest rates and reduced investment. Additionally, long-term housing demand may decline as a result.

Can Xi set a new course?

Can Xi set a new course?

China's leadership, meeting this month to discuss economic targets and policies for the coming year, has expressed its intention to increase fiscal and monetary support for the economy. Officials have also committed to enhancing "economic propaganda" and "public opinion guidance" in order to bolster confidence.

According to Chinese media reports, the government is considering setting next year's economic target at around 5%, a figure that appears ambitious in comparison to independent forecasts. The official target will be revealed in March during China's annual legislative meetings.

The measures are unlikely to address the underlying structural issues. "It seems that policymakers are banking on some stimulus and a change in sentiment to get the economy back on track," noted Julian Evans-Pritchard, head of China Economics at Capital Economics. He also observed that officials are counting on an aggressive growth target to bolster confidence.

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Here's Xi Jinping's vision to make China great again

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President Xi Jinping of China participated in the fourth plenary session of the National People's Congress (NPC) at the Great Hall of the People in Beijing on March 11, 2023. GREG BAKER/Pool via REUTERS

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If Beijing goes back to its previous strategies, like increased borrowing, it may be able to stimulate growth by 2024, but only as a temporary solution, not a permanent fix," said Scissors.