All the high-frequency data coming from Beijing have, by now, established that the world's second-largest economy is slowing down but one thing that economists and financial experts are still divided on is whether China can stage a comeback considering the growing challenges like a sharp rise in youth unemployment, mounting debts, and a slowdown in domestic consumption. China watchers say that Beijing has proven in the past that it has the ability to bounce back and it may do it again despite concerns that its current challenges are far deeper than what it overcame in past years. "Never underestimate China's ability to make a comeback," said Kishore Mahbubani, former President of the UNSC, while speaking to India Today on Sunday.
IMF's Deputy Managing Director Gita Gopinath also believes that China has the capability to "turn things around". "After the first quarter which was very strong because of the rebound from the re-opening, China's economy has slowed," said Gopinath in an exclusive interview with India Today Group's News Director Rahul Kanwal. "And we see that in private consumption, the real estate sector, of course, has had a lot of trouble for a long time. We saw some improvement in the first few months, but again we see a deterioration. So that is an area of concern. Investment is down, confidence is down, consumption is down, and private investment is down."
China, which achieved spectacular growth since it opened up its markets in the late 1970s, is facing a serious crisis due to emerging faultlines in its real estate sector - which accounts for nearly 30 per cent of its GDP, according to CaixaBank Research. China's second-largest real estate firm - Evergrande Group - has already filed for bankruptcy, and its largest firm Country Garden is on the verge of collapse.
Unemployment in youth (16-24 years) jumped to a historic high of nearly 21 per cent as per the last data in July but some feel it may be as high as 50 per cent. The slowdown has triggered a vicious cycle for China, where people are not sure about their future income so they are saving more, which has brought down consumption that in turn has forced the firms to pause further investment and capacity expansion as the demand has slowed down.
But despite challenges, Gopinath thinks: "China has the resources to turn things around - it still can do much more in terms of fiscal policy in terms of monetary policy." She said Beijing is taking actions in that dimension but these are things that can not be turned around overnight. "We expect China's growth to slow. This year, we think that China can meet the target of 5 per cent growth the government has set. But in the medium term, we have China's growth projected around 3.4 per cent." She, however, made it clear that it was not like the IMF was expecting a very deep downturn and sharp recession - "it's just slowing growth."
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With over 19 trillion dollar GDP, China is the second largest after the United States. Its economic slowdown has also triggered a debate about whether the economy's base has reached a level from where it is obvious that the growth rate will come down. "It is more than that," Gopinath said. "We have revised our projection relative to pre-pandemic given the developments we have seen."
When asked whether China can takeover the US, which has a nearly 27 trillion dollar GDP, Gita said it will depend on what policy measures China takes. "It has displayed to be able to make changes in its economic path but the combination of what we are seeing in the private sector, slowing confidence, global demand for manufacturing goods have come down - These are all headwinds for China."
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Last month, US Secretary of Commerce Gina Raimondo said that she was hearing from businesses that China had become "uninvestable because it's become too risky". The Covid pandemic was the time when many businesses and countries felt the downside of overreliance on one country and putting all eggs in one basket as is the case with China, which has become the manufacturing powerhouse. Chinese President Xi Jinping's crackdown on private players - like Jack Ma's Ant Group - and opaqueness in the way the system operates has forced some global firms operating there to look for an alternative to shift their operations.
The US under Joe Biden has doubled down in tariffs on imports from China. Biden has prohibited new US investment in China in sensitive technologies like computer chips and in other tech sectors as the tensions between Washington and Beijing grow over Ukraine and Taiwan, which is the semiconductor powerhouse and meets the supply of over 60 per cent of global chip demands. Gopinath said that the geopolitical tensions are showing up in countries moving away from each other, for instance, import restrictions. "Last year, 3000 import restrictions were put, three times the numbers put in 2019. And if you look at where FDI is going, it is driven by geopolitical consideration as opposed to geographic distance which used to play a bigger role."
China is also facing another big crisis - a declining workforce. In July this year, American economist and Nobel laureate Paul Krugman said China was going to be the next Japan, which was once seen as the next superpower that could takeover the US. "Some have been asking whether China’s future path might resemble that of Japan. My answer is that it probably won’t — that China will do worse," he wrote in an article published in The New York Times.
Krugman said that there were some obvious similarities between China and Japan in 1990. "China has a wildly unbalanced economy, with too little consumer demand, kept afloat only by a hypertrophied real estate sector, and its working-age population is declining," he said.
The economist noted that unlike Japan in 1990, most of the Chinese economy was still well behind the technological frontier, so it should have better prospects for rapid productivity growth. But, he added, there were growing concerns that China may have fallen into the "middle-income trap" that seems to afflict many emerging economies, which grow rapidly but only up to a point, then stall out.
"China isn't likely to be the next Japan, economically speaking. It's probably going to be worse."