China’s Economy: The Weakened Dragon

While 2024 may be the year of the mighty dragon, debt, inflation and frivolous projects are wreaking havoc on China’s economy.

Feb 19, 2024 | By Michel Santi
Image Courtesy of CNN Money & Shutterstock

The 2008 financial crisis marked a decisive turning point in the Chinese economy — adverse effects of which are still being felt today. Fearing a contagion that would affect their banking system and the detrimental consequences of a decline in exports due to the slowdown in global demand, Chinese officials believed—following the path laid out by the United States—that only intensive monetary creation would cushion the shocks. Chinese banks were therefore strongly encouraged by the state to lend, primarily for the construction of infrastructure that the country did not really need.

A view of the Tianducheng development in Hangzhou (Image courtesy of REUTERS/Aly Song)

The enthusiasm was indeed unprecedented, and enormous sums were dedicated to building several “Little Manhattans,” and “Little Hong Kongs,” a replica of the Red Square, a mini Paris, and other similarly frivolous and costly projects. Chinese investors, both private and institutional, as well as smaller savers, were literally pushed into the arms of intense real estate speculation, leading the country’s banks to commit to mass loans in just five years, equivalent to the loans accumulated by the entire United States banking system. This sudden enrichment, however, was fundamentally useless for the economy because wages—especially those of the most modest—stagnated and did not keep pace with this acceleration of prosperity, which we now know was artificial.

The Chinese stock market at a stock exchange hall in 2015 in Fuyang, China. Image courtesy of China Foto Press & Getty Images

The levels of indebtedness in the Chinese financial system gained attention globally, as 70 percent of the assets and portfolios of banks in the nation consisted of real estate. A harsh reality: a mere 5 percent decrease in this market would result in a loss of nearly USD 3 trillion, according to Bloomberg. The malaise is now widespread in China, and it is the result of a series of governance errors, exacerbated by a particular focus on security and technology.

A factory employee works on engines in Qingzhou, China (Image courtesy of Photo by AFP & China OUT)

It is of course crucial and very commendable for the ruling elites to have clearly favoured the production of electric vehicles, industrial machinery, ships, semiconductors, and so on. However, nothing has been done to stimulate household consumption, except for the false sense of wealth conferred by past real estate appreciations, which were nothing but smoke and mirrors. It is therefore a policy of excessive supply—almost caricatural—that was demanded of all actors at the expense of aggregate demand, which is condemned to remain chronically low for years to come.

Visitors at Shanghai’s Yu Garden during the 2024 Lunar New Year holiday (Image courtesy of Reuters)

China is now taking us by the hand towards deflation. Knowing that, on the other hand, its industry, both cutting-edge and highly competitive in terms of prices, will inevitably trigger protectionist reflexes around the world. The malevolent 3 Ds—Debt, Demand, and Demography—are not done wreaking havoc in China, where the Year of the Dragon may rhyme with stagnation.

For more on the author, Michel Santi and his exclusive opinion pieces like this one, visit his website here:

For more on the latest in global economic and business reads, click here.

Back to top