The End of China’s Economic Miracle

How Beijing’s Struggles Could Be an Opportunity for Washington

 
As 2022 came to an end, hopes were rising that China’s economy—and, consequently, the global economy—was poised for a surge. After three years of stringent restrictions on movement, mandatory mass testing, and interminable lockdowns, the Chinese government had suddenly decided to abandon its “zero COVID” policy, which had suppressed demand, hampered manufacturing, roiled supply lines, and produced the most significant slowdown that the country’s economy had seen since pro-market reforms began in the late 1970s. In the weeks following the policy change, global prices of oil, copper, and other commodities rose on expectations that Chinese demand would surge. In March, then Chinese Premier Li Keqiang announced a target for real GDP growth of around five percent, and many external analysts predicted it would go far higher.

Initially, some parts of China’s economy did indeed grow: pent-up demand for domestic tourism, hospitality, and retail services all made solid contributions to the recovery. Exports grew in the first few months of 2023, and it appeared that even the beleaguered residential real estate market had bottomed out. But by the end of the second quarter, the latest GDP data told a very different story: overall growth was weak and seemingly set on a downward trend. Wary foreign investors and cash-strapped local governments in China chose not to pick up on the initial momentum.

This reversal was more significant than a typical overly optimistic forecast missing the mark. The seriousness of the problem is indicated by the decline of both China’s durable goods consumption and private-sector investment rates to a fraction of their earlier levels, and by the country’s surging household savings rate. Those trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritizing short-term liquidity over investment. That these indicators have not returned to pre-COVID, normal levels—let alone boomed after reopening as they did in the United States and elsewhere—is a sign of deep problems.

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