When we think of China, we see a global giant—home to the world’s second-largest economy after the U.S. and the manufacturing hub for countless industries. However, it wasn’t always this way. India and China started at similar levels, but since the 1980s and 1990s, China’s rise has been remarkable, transitioning from an agrarian economy to a global manufacturing powerhouse.
Yet, in the past few years, China’s economic engine has been slowing. Once compared to the U.S., China is now being likened to Japan’s ‘Lost Decade’. Quite the shift, isn’t it?
As you can see from the chart above, Chinese Equities haven’t made long term investors very happy.
While this topic of China’s economic problem is quite complex and long, I will try to compress and simplify this today.
So, What Do the Numbers Say?
Source: IMF; National Bureau of Statistics of China
China’s GDP growth dropped to 5% in 2023, down from 6-7% pre-COVID. Factory output, consumer spending, and investment have all slowed more than expected.
Unemployment rose to 5.3% in August 2024, and urban youth unemployment spiked to 17.1% in July from 13% in June.
But Why Is This Happening?
Real Estate Crisis: Once about one-fourth of China’s economy, real estate is now struggling. Developers like Evergrande have defaulted, hurt by COVID-19 impacts and government crackdowns on property prices. This has left about 60 million unsold apartments, which could take over four years to sell.
Low Public Confidence: Homeownership is a key investment in China, but falling property prices, unfinished projects, and low consumer confidence are hurting the market. Overall, consumer demand remains below pre-pandemic levels.
Source: The Wall Street Journal
Rising Unemployment and Aging Population: Weak consumer demand has made businesses reluctant to invest and hire, leading to high youth unemployment. Meanwhile, China’s ageing population means a shrinking workforce and lower consumer demand.
Deflationary Pressures: Stagnant or falling consumer prices and over a year of price cuts by companies are driving deflation. This makes debt repayment harder for households and businesses, reducing spending and trapping the economy in a downward spiral.
Falling Foreign Investment: In early 2023, China faced a net outflow in its balance of payments for the first time since 1998 as foreign investors withdrew. Even stock and bond markets saw capital outflows, straining the financial system.
How Is the Government Responding?
The Chinese government has undertaken several measures to boost the economy, some of which we have covered below:
Monetary Easing: The People’s Bank of China (PBoC) has been cutting interest rates to make loans cheaper, aiming to boost borrowing, investment, and consumer spending.
Stimulating Demand: The government is offering subsidies for cars, home appliances, and other incentives to revive consumer spending.
Infrastructure Investments: China is investing heavily in infrastructure projects like high-speed rail and green energy to create jobs, modernise the economy, and ensure long-term growth in a tech-driven world.
But will it be Enough?
China’s government has rolled out a massive $284 billion investment through special sovereign bonds to boost critical sectors like technology and green energy. These are typically reserved for moments of crisis, and this move underscores the seriousness of China’s situation. But many are worried about China’s rising debt -its debt-to-GDP ratio is already above 280%. If growth doesn’t pick up, this borrowing could become a long-term headache.
What Does This Mean for India?
These measures by the Chinese policymakers led to cheers in the Chinese stock markets with the SSE Composite Index rising by 15%+ within one month.
It was speculated that some investments are shifting from India to China, leading to a slight correction in the Indian markets. However, this correction might be temporary, as India isn’t facing the structural challenges that China is.
China’s challenges in manufacturing & geopolitics are creating new opportunities for India. As global companies look to diversify their supply chains, India is emerging as an attractive alternative with a growing workforce and improved infrastructure.
But let’s be clear – India’s goal shouldn’t be merely to replace China as the world’s factory. Instead, we should focus on building a balanced economy where manufacturing thrives alongside other sectors.
Let us know what are your thoughts on this topic!
Till the next time,
Vijay
CEO – InCred Money
P.S. I share my thoughts on Investing and the Economy regularly. You can follow me here.
