Figures released by Chinese government sources portray both a resilient as well as an alarming picture of the state of China’s economy. The systemic problems are challenging and could be ameliorated only by government intervention

by B R Deepak

In the wake of China’s plummeting economic indicators, economists have been debating the “economic collapse” of China. Paul Krugman, in an opinion column in the New York Times, posits that China’s economic stumble is systemic and holds China’s resistance to reforms responsible for it. However, he argues that even if the “Chinese leadership seems to be growing more autocratic and more erratic with each passing year”, he believes that they will push through those reforms and “put more income in the hands of families, so that rising consumption can take the place of unsustainable investment.”

This argument has been trashed by John Ross, a senior fellow at Chongyang Institute for Financial Studies, Renmin University of China. Ian Johnson, in a recent article in Foreign Affairs, prefers to call it Xi’s Age of Stagnation or “new national stasis”, or involution (内卷). Unlike Krugman, he sees the root cause for China’s economic troubles in “political ossification and ideological hardening.”

This perspective matches that of Liu Mengxiong, former member of China’s CPPCC, who in an attack on Chinese leadership said that the reason for China’s recent “downward economic spiral” lies in economy, “but the root cause is the politics.” He argued that the three engines of investment, consumption and exports of China’s growth story have run out of steam (动力不足) and even could come to a grinding halt (死火). Citing the figures of the National Bureau of Statistics (NBS) for July 2023, he said these showed deflationary trends. According to Liu, in the second quarter, the amount of foreign investment in China touched only US$4.9 billion, down 87% compared to the previous year. Now the “new three engines of growth” according to him are the NBS, the Central Publicity Department of the CPC and the Xinhua News Agency. Adam Posen, in an article in the Foreign Affairs also argued that it was the “end of China’s economic miracle.”

Now, what are the economic indicators revealing? According to the NBS, the economy continued to recover and improve in the first half of the year, achieving continuous quarter-on-quarter growth. It says that in the first half of the year, China’s GDP registered a year-on-year increase of 5.5% at constant prices. Primary, secondary and tertiary industries grew by 3.7%, 4.3% and 6.4%, respectively. The data also reveals that the investment in real estate fell by 8.5%. The sales area of commercial housing nationwide was 665.63 million square meters, a year-on-year decrease of 6.5%; the sales volume of commercial housing was 7,045 billion yuan, a decrease of 1.5%. In July, the national consumer price index (CPI) fell by 0.3% year-on-year; the total retail sale of social consumer goods was 3,676.1 billion yuan, a year-on-year increase of 2.5%, and a month-on-month decrease of 0.06%.

Nonetheless, the biggest cause of concern has been the unemployment rate, which for the age group of 16-24 was 21.3% in June, and the NBS stopped issuing the figures since then. In the words of Fu Linghui, spokesperson of the NBS, the overall employment pressure is caused by the structural problems, as a result, the “young people find it difficult to get jobs (求职难) and certain sectors find it difficult to recruit employees (招工难).” As regards foreign trade, in July, exports fell by 9.2%; and imports by 6.9%. From January to July, the import and export of general trade increased by 2.1% year-on-year basis.

Going by these figures, except for the unemployment rate, the Chinese economy is not doing bad, but why is there so much clamour about its collapse? The “difficulties and challenges” faced by China, according to an opinion piece in Huanqiu Shibao, are: insufficient domestic demand (内需求不足), some enterprises have difficulties in running their business (经营困难), key areas (重点领域) are fraught with many risks and hidden dangers (风险隐患), and the external environment is complicated and grave (复杂严峻). These challenges have been affirmed by the meeting of the Political Bureau of the Central Committee of the Communist Party of China on 24 July 2023. In fact, all these problems are interconnected and are structural as pronounced by some of the experts above. Let’s visit the three pillars of China’s economic resilience and the problems they are encountering.

As I have argued in an occasional paper written for the Institute of Chinese Studies recently that the economic growth during the Reform Era was driven by massive government investment accounting for around 45% of the GDP, most of which went into infrastructure and real estate as Chinese citizens invested almost 70% of their savings in the latter. The magnitude of the investment could be gauged through official figures released early February this year by Zheng Guoguang, Director of the Office of the Leading Group for the First National Natural Disaster Comprehensive Risk Survey of the State Council. According to the figures, China has around 600 million buildings in urban and rural areas; 5 million kilometres of road networks; 900,000 bridges and tunnels, as well as more than 6,000 berths in coastal areas. This doesn’t include around 40,000 kilometres of high speed railway.

This is the kind of construction frenzy that went on during the reform period. However, currently investments in infrastructure and real estate have turned non-productive, which led to a spurt in debt to GDP ratio, bad debts and mortgage crisis. With the bursting of the real estate bubble, investments remain in jeopardy and returns are bleak. Real estate giants like Evergrande and Country Garden are unable to service their debts, so is the case with 50 odd other real estate companies in China. According to, there are more than 400 million people with mortgages in China, and the total amount of mortgage loans exceeds 50 trillion yuan. This shows that speculation in real estate has been the norm.

As for the foreign investment in China, official figures reveal that from January to July 2023, the actual use of foreign capital in China was 766.71 billion yuan, a year-on-year decrease of 4%, equivalent to US$111.8 billion, a decrease of 9.8%. Statistics from China’s State Administration of Foreign Exchange show that foreign companies’ inward direct investment in building factories etc., in China from April to June was US$4.9 billion. The decrease compared with the same period last year reached 87%, setting a new high. An article in Nikkei has argued that it has resulted from the US policy of promoting “friend-shoring” so as to build supply chains with friendly countries. It may be recalled that the US has put investment restrictions on China in the fields of semiconductors and artificial intelligence. Therefore, if the “decoupling” or the “de-risking” continues, FDI in China is bound to face further hurdles.

The second pillar that drove Chinese economy was consumption. In fact, the issue is related to investment, both public and private. As returns in the real estate are diminishing, this has dealt a heavy blow to household appliances and other ancillary industries. Moreover, the vicious cycle of debt is a bigger problem. According to data released by the Central Bank of China, as of the end of 2022, 780 million people across China were in debt, with an average per capita debt of 133,400 yuan. Not to mention of credit cards, the overdue amount exceeded 200 billion yuan. According to the Toutiao news, of the above 780 million people, the overdue rate was 42%, implying that almost 300 million people had defaulted on servicing the debt.

The third pillar of China’s economic miracle has been exports. Undoubtedly, China has emerged as the largest trading partner of more than 120 countries in the world. The US economic dominance has long been over. Nevertheless, recent statistics published by the National Development and Reform Commission reveal that in the first half of 2023, China’s total import and export volume was US$2.92 trillion, a decrease of 4.7%. Among them, exports were US$1.66 trillion, down 3.2%; imports were US$1.25 trillion, down 6.7%; the trade surplus was US$408.69 billion, an increase of 6%. However, if we look at the July figures alone, a BBC report reveals that China’s exports to the US fell by 23.1% year-on-year, and to the EU by 20.6%. Obviously, sluggish global growth has reduced the demand for Chinese goods; the US-China hi-tech war; geopolitical tensions between the two largest economies, and the de-risking from China by the West have also contributed to the plummeting figures in trade and investment.

In conclusion, the figures released by Chinese government sources portray both a resilient as well as an alarming picture of the state of China’s economy; especially, the systemic problems are challenging and could be ameliorated only by government intervention. The deepening of the reforms in sectors such as telecom, energy, insurance, information technology, where government has denied market access to foreign investors, could be an option. The rejuvenation of private enterprises, which according to Shi Jinchuan, Professor at Zhejiang University, has faced “twofold challenge of obstructed vertical advancement and heightened horizontal competition” and oversteps such as “administration superseding law” remain problematic. The stimulus is another option, but the Chinese government has been hesitant so far. More importantly, as long as the troubled real estate sector as well as provincial governments’ debt crisis is not handled properly, the vicious cycle will persist. Added to this, as long as the sluggish external demand and China’s geopolitical and security environment remains in disarray, the sustainable recovery of the Chinese economy, and consumption replacing the investment calculus would not be easy.

B R Deepak is Professor, Centre of Chinese and Southeast Asian Studies, Jawaharlal Nehru University, New Delhi