China is facing a series of daunting economic challenges, with dark clouds looming over its long-term stability. The country’s low birthrate and aging population, largely the result of the decades-long “one child policy,” are set to strain productivity and significantly increase health care and social support costs. Compounding these issues, overall population shrinkage has emerged as a critical problem since the pandemic, pushing China’s economy onto what University of California, Irvine professor Wang Feng describes as “a road of demographic no-return.”
In the short term, China’s economic recovery from the Covid-19 crash has been less robust than anticipated. Rather than a post-lockdown buying frenzy, the economy has been marked by continued sluggishness. Demand has been widely identified as a key issue, yet party-state rhetoric remains focused on production. At a major policy-planning event this year, the third plenum, party officials opted against stimulating consumption, effectively maintaining the status quo.
The consequences of this approach are becoming increasingly apparent. Consumer confidence has weakened significantly, with many Chinese citizens now “trading down” from higher-cost goods to cheaper alternatives in an effort to stretch their spending power. According to The Economist, retail spending in Shanghai, China’s consumption capital, fell by 2.3% year-on-year in the first half of 2024, a stark indication of the broader trend. The phenomenon of “downgrading” has become widespread, with near-expiry-date makeup shops and clearance stores offering snacks and lipstick at heavily discounted prices gaining popularity across social media.
However, these immediate challenges are only part of the story. The Chinese economy is also grappling with lagging GDP growth, trade headwinds resulting from geopolitical tensions with the United States, a collapse in property prices—which triggered the default of real-estate giant Evergrande—and tight regulatory measures under President Xi Jinping. These factors are all contributing to what Council on Foreign Relations fellow Zongyuan Zoe Liu describes as a significant design flaw in China’s economic strategy.
Liu points to Beijing’s decades-old economic policy, which prioritizes industrial production above all else, as a core issue. This strategy has led to overinvestment in production facilities across various sectors, from raw materials to emerging technologies like batteries and robots. The result has been enormous structural overcapacity, saddling Chinese cities and firms with unsustainable debt burdens. As Liu explains, China is now producing far more output than it or foreign markets can absorb, risking a dangerous cycle of falling prices, insolvency, factory closures, and ultimately, job losses.
While China’s leaders view the country’s industrial base as a key strength, consumption is often dismissed as an “individualistic distraction.” Liu warns that in the event of an intensified trade war, Beijing may be tempted to double down on its production-first strategy, further entrenching the economic vulnerabilities that threaten the nation’s long-term stability.
Source: Fareed Global Briefing
