[Why&Next] "Sasangnugak" Chinese Economy... "If SOC Overinvestment Occurs, 4% Annual Growth Will Be Difficult"

China's August Economic Indicators Improve, Raising Recovery Hopes
However, Stimulus Measures Delay Structural Reforms
Positive in Short Term, Negative in Long Term
IMF: "4% Growth Difficult Without Structural Reforms"

As China's consumption and production, which had been on a downward spiral, showed a slight rebound last month, there is an analysis that the Chinese economy has hit bottom and is recovering. However, since structural flaws such as local government debt and low productivity, which are chronic problems of the Chinese economy, still remain, many forecasts say it is still too early to mention a recovery in growth rates from a mid- to long-term perspective.

Is the Chinese Economy Reviving? Consumption and Production Rebound

According to major foreign media and institutions on the 19th, evaluations of China's economic outlook have been divided since the release of China's August consumption and production indicators last week. Until last month, concerns about a 'China crisis' arose as the July consumer price index in China fell into negative territory (-0.3%) and there were even worries about a default by Biguiyuan, the largest private real estate developer. However, recent economic indicators have shown a gradual improvement.

According to data from the National Bureau of Statistics of China, the retail sales growth rate (year-on-year) in August was 4.6%, and industrial production growth was 4.5%, both improved compared to the previous month. Retail sales serve as a gauge of domestic demand through retail store sales figures, and industrial production acts as a leading indicator for employment and average income. This is a positive change for China, which had shown signs of deflation (price decline). Exports last month also continued to decline by -8.8%, but the decrease was significantly smaller than the previous month (-14.5%), and China's unemployment rate also fell to 5.2% from 5.3% in July. In response, China self-assessed that "production and supply steadily increased, market demand gradually improved, and the national economy showed a rapid recovery."

Bloomberg also analyzed that "China's major economic indicators are improving" and "there is a possibility of escaping the worst phase of economic downturn." Although the real estate market slump, which severely shook the Chinese economy, has not yet been resolved, expectations are rising that as the government has poured out stimulus measures such as lowering housing deposits and mortgage interest rates to revitalize the market, the policy effects will take hold in the second half of the year, improving market sentiment.

Chinese President Xi Jinping [Image source=Yonhap News]

Structural Problems of the Chinese Economy Remain

However, it is difficult to judge that the Chinese economy has entered a full-fledged recovery just because some indicators have improved. The recent rebound in indicators is not due to the resolution of structural problems that have weighed down the Chinese economy but largely due to the stimulus measures poured out by the Chinese government. In fact, the Chinese government announced more than 20 stimulus measures last month alone, and on the 14th, it lowered the reserve requirement ratio of financial institutions by 0.25 percentage points, injecting about 500 billion yuan of liquidity into the market.

Chinese President Xi Jinping has attempted to deleverage the real estate market over the past few years to move away from a debt-based growth model, but it is interpreted that recently the direction has shifted back toward stimulus measures. While injecting liquidity and partially recovering the real estate market may temporarily revive domestic demand and the economy, fundamental issues such as local government debt, polarization, and structural reforms for productivity improvement are inevitably delayed.

When the global financial crisis broke out in 2008, China also injected a large-scale policy fund of 4 trillion yuan to respond to the economy. In this process, funds were concentrated in traditional industries such as steel, coal, cement, and real estate infrastructure, resulting in inefficient resource allocation such as severe overcapacity and redundant investment. This led to a decline in the profitability of state-owned enterprises and an increase in marginal companies, accumulating real and financial risks that continue to this day.

The Chinese government has recognized these problems and has promoted structural reforms several times in the past, but they have rarely produced results as they were repeatedly pushed aside by economic responses. Lee Chi-hoon, head of the Emerging Economies Department at the International Finance Center, explained, "The various stimulus measures announced by the Chinese government are different from structural reforms in the long term," adding, "From a big-picture perspective, artificial stimulus measures can increase debt again and produce side effects such as prolonging marginal companies."

The International Monetary Fund (IMF) also views that China's growth rate will be difficult to recover unless structural reforms precede. Kristalina Georgieva, IMF Managing Director, recently said in a foreign media interview, "If there are no structural reforms in China, the medium-term growth rate could fall below 4%," and pointed out, "The traditional approach of pouring more money into social infrastructure is not productive in the current situation."

US 'Semiconductor Regulations' Likely to Tighten Due to Huawei Incident

The fact that the US is isolating China's semiconductor industry along with South Korea, Japan, and Taiwan is also a negative factor. Chinese Huawei boasted its resilience by launching a smartphone equipped with a 7nm (nanometer, one billionth of a meter) chip at the end of last month despite the US's comprehensive semiconductor regulations. However, this incident is likely to lead to even stronger US regulations. There is also analysis that the US will tighten its de-risking net against China and expand the list of export restrictions.

Since China's economic growth model relying on quantitative input has reached its limit, fostering advanced industries is urgent, and US regulations like these can be fatal. The International Finance Center stated, "The essential processes of semiconductor manufacturing such as design, lithography equipment, components, and precision production are all monopolized by the US and its allies, and China's semiconductor industry share is less than 10%," adding, "China has experienced compressed growth, but the semiconductor industry faces difficulties in such industrial upgrading strategies."

There is also analysis that China may weaponize key minerals, which are core raw materials for advanced semiconductors, to counter the US, but this would inevitably lead to a full-scale conflict not only with the US but also with neighboring countries, making its feasibility questionable. Although China has strengths in raw material supply chains, its large economic scale also means high resource dependence. Energy import dependence reaches 70% for crude oil and 40% for natural gas, and the food self-sufficiency rate is 66%, which is vulnerable compared to the US.

There is an analysis that the key to China's continued growth will ultimately be the success of structural reforms. The World Bank stated, "If China successfully carries out structural reforms such as reorganizing state-owned enterprises and shifting to consumption-oriented growth, it is likely to maintain a growth rate in the 5% range until 2030." Choi Seol-hwa, a researcher at Meritz Securities, explained, "Overall, China risks have calmed down, but due to uncertainties in debt restructuring, real estate developer stocks showed differentiated trends, and foreigners net sold 2.5 billion yuan despite positive factors."

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