China’s economic rebound is faltering and Jamie Dimon, the JPMorgan chair, is not the only one concerned. Dimon, who spoke at a Shanghai banking conference on Wednesday, called youth unemployment rates in China “scary”. He added that economic uncertainty had been “somewhat caused” by the Chinese government.
The latest signs of slowing are found in high-frequency economic data. But the structural challenges that the Chinese economy faces are much deeper and more long term. The decades of “reform and opening” that drove a trade and investment bonanza are giving way to a phase of security and control led by President Xi Jinping.
Xi’s concept of “comprehensive national security” — which defines 16 broad arenas including the economy, society and culture as matters of national security — has replaced the pro-growth doctrine that used to animate Beijing’s administration. Some analysts suggest we are entering the era of “plateau China”: an extended period in which growth settles into the low single-digit range, down from 2023’s official target of “around 5 per cent”.
There are good reasons to think it could indeed be China’s fate to become a low-productivity superpower. By dint of its sheer size it would still contribute to global economic expansion, but it would fall progressively short of the 35 per cent contribution to global growth that the IMF predicts for this year.
Such a scenario would have profound global implications. Most obvious would be to reduce China’s role as locomotive of the Asia-Pacific region, which the IMF forecasts will contribute 67.4 per cent of global growth this year. A slower growing China, coupled with efforts to increase domestic ownership of its industries, could also deal a blow to western multinationals that have become dependent on sales there.
With so much at stake, it is important to assess how deep-seated China’s economic frailties are. A big part of the drag emanates from a weak property market and the related distress of thousands of local government financing vehicles, which over the past decade have provided the main impetus behind China’s investment-driven growth.
Reviving the property sector is not straightforward. In April, sales of property by area and investment in building new homes were down significantly from the same month a year earlier. This, in turn, hits the incomes of local governments, which depend to a significant extent on selling land to property developers.
Some city government entities, such as in Kunming and Wuhan, have scrambled in recent weeks to repay maturing debts. Unless Beijing provides some form of debt support to local government financing vehicles, which according to the IMF have some Rmb66tn ($9.3tn) in debts, such episodes of distress are likely to persist.
So it is incumbent on Beijing to start a comprehensive programme to restructure local government finances. This should not be a simple bailout but a transparent programme to recapitalise LGFV balance sheets partly by selling off local assets. Such a course may encounter local resistance. But without it, China may be consigned to a generation of sub-par growth.
China also needs to reinvigorate its private sector, in particular the tech companies that have suffered a regulatory barrage in recent years, to help generate jobs for the 18- to 24-year-old urban cohort, some 20 per cent of whom are unemployed.
Taking even just these measures should help Beijing put its economy on track for more sustainable growth. Failure to do so could smother China’s economic renaissance under the weight of growing state control.