[Insight & Opinion] Perspectives on China's Economic Crisis

Authoritarianism and Investment-Driven Growth Model as Causes
Some Analysts Point to Real Estate as the Main Trigger
Bold Regulations in China Disrupt the Economic Ecosystem

The Chinese economy is showing signs of trouble. In July, the Producer Price Index fell by 4.4% year-on-year, and the Consumer Price Index dropped by 0.3%. Imports decreased by 12.4%, and exports also declined by 14.5% compared to the same month last year. The youth unemployment rate in China reached 21.3% in June. It appears as if China is beginning to resemble the Japanese economy after its bubble burst. Why has this happened?

Adam Posen, president of the Peterson Institute for International Economics, recently published an article titled "The End of China’s Economic Miracle" in Foreign Affairs. He argues that the fundamental cause of China’s economic problems lies in its authoritarian system. Since the reform and opening-up, China had been suppressing its authoritarian tendencies, but after the outbreak of the COVID-19 pandemic, it responded with authoritarian measures, finally revealing its true nature. Due to the widespread fear this caused, Chinese society as a whole chose a defensive retreat, he analyzes. He also believes that the Chinese government’s strong regulations on high-tech companies under the banner of "common prosperity" intensified these fears. This led to a contraction in consumption and investment, resulting in an economic crisis. Posen asserts that only a fundamental transformation from autocratic rule to the rule of law can guarantee China’s growth. He also suggests that the United States should actively accept the capital and talent fleeing China. His view is heavily shadowed by the new Cold War between the U.S. and China.

Meanwhile, Michael Pettis, a professor at Peking University’s Guanghua School of Management, analyzes that the root problem of China’s economy lies in its investment-driven growth model. China has actively pursued a debt-based, investment-centered growth strategy, but the government’s suppression of household income growth has resulted in a low consumption ratio, which is problematic. However, in May 2020, President Xi Jinping proposed a new economic model called "dual circulation," a strategy centered on consumption.

However, Adam Tooze, a professor at Columbia University, points out that neither view fully explains the exact cause of China’s economic problems. In his opinion, the biggest cause lies in real estate. The real estate sector, including related industries, accounts for about 20-30% of China’s gross domestic product (GDP). Additionally, about 70% of personal assets in China are in real estate. Therefore, the real estate market is highly likely to be the main cause of economic instability.

The Chinese government shifted its policy direction, stating that "housing is for living, not for speculation," and began regulating real estate financing in August 2020. This became a decisive turning point. Since then, real estate developers, individual investors, and local governments rushed to repay debts and sell assets. Housing prices fell, the number of abandoned properties under construction increased, and corporate bankruptcies rose. In 2022, the area of homes sold in China dropped by 24% year-on-year, and real estate investment decreased by 10% compared to the previous year. Eventually, China’s largest real estate developer, Country Garden (Biguoyuan, 碧桂園), faced financial difficulties and stood at the brink of collapse. Furthermore, as local governments’ land-use rights transfer revenues sharply declined, they faced fiscal difficulties, making it hard to implement proactive economic measures. Reduced investment in real estate and infrastructure led to excess production capacity in basic materials such as steel, and corporate capital investment stagnated.

Ultimately, the Chinese government’s bold regulations caused turmoil in the complex economic ecosystem. These were unintended side effects the government did not anticipate. How the government manages this to overcome the crisis will be a challenging task.

Kim Dong-gi, author of "The Power of Geopolitics"

This content was produced with the assistance of AI translation services.