China’s economy: ‘the garbage dump of history’ as growth model hits a dead end
Chinese people are so depressed about the economic outlook that many have taken to social media to call this the “garbage era of history,” a reference to the end of NBA games when the outcome is already decided and players are forced to play until the end of the game.
Use earned phrases reprimand from state media throughout the summer, but it tapped into a deep gloom that has spread to Wall Street as new data showed the worsening weakness of key economic drivers. Bank of America recently cut its 2024 growth forecast from 5% to 4.8% and expects it to slow further over the next two years to 4.5%.
In an article for Monitoring Chinese leaders Last week, Rhodium Group partner Logan Wright said that while China is still growing faster than many other countries, its global influence may have peaked in 2021.
At that point, it will reach 18.3% of world GDP, before falling to 16.9% in 2023. Meanwhile, the US share is at around 25%.
The problem is not just cyclical. “The main reason for China’s structural slowdown is one that Beijing acknowledges: its credit- and investment-led growth model has run into trouble,” Wright said.
All that capital has fueled massive real estate construction and infrastructure development. But neglect has replaced them as growth engines, and China’s faltering financial system is unlikely to generate any new momentum, he writes.
Credit expansion will slow, dragging down investment growth and the economy’s long-term prospects, he said, while political leaders’ fears of defaults, bankruptcies and rising unemployment are preventing the financial system from channeling capital into more productive sectors of the economy.
“The financial system itself is now constraining China’s economic growth rather than facilitating it,” Wright explained. “In addition to demographics and the changing external environment, financial constraints are a key reason why China’s economic slowdown is structural and why the Chinese economy is likely to grow below its potential over the next decade.”
To be sure, Beijing knows its old growth model cannot last and has been promoting advanced manufacturing in emerging sectors like electric vehicles and green energy as alternatives. But he said these sectors are not big enough to offset slowing infrastructure or real estate construction.
China’s leaders have also identified the need to rebalance the economy toward more consumption rather than investment. But that is hampered by income inequality, which requires a fiscal policy overhaul to favor transfer payments that boost household spending.
Given these headwinds, Wright predicts that consumer growth will likely continue to slow and weigh on future economic growth.
President Xi Jinping and other Chinese leaders may not fully grasp the gravity of the situation, as the official economic statistics they consume are increasingly questionable. At the same time, they also appear focused on surpassing the United States as the world’s top economy.
But if Xi and company can change their worldview, it could help the Chinese economy, Wright said. For example, export-led growth based on capturing global market share will create trade barriers. Conversely, a greater focus on domestic consumption could reduce trade friction.
However, he still does not believe that will happen.
“The Chinese economy’s peak in global influence also presents Beijing with a new opportunity to realistically redefine its goals and become less confrontational with the rest of the world’s economic and political interests,” he said. “But we have no illusions that such a redefinition is possible.”
The warning comes as investors have also been shocked by recent warning signs about China’s economy.
PDD Groupparent company of e-commerce giant Temu, which stunned Wall Street last month with weak quarterly results and warned that stiff competition would cut into future profits. Shares fell more than 30%, wiping $50 billion off PDD’s market value.
It is the latest warning sign that the world’s second-largest economy is may be on a downward spiral due to overproduction and Beijing’s industrial planning.
“Simply put, in many key economic sectors, China is producing more output than it or foreign markets can sustainably absorb,” Zongyuan Zoe Liu, a China scholar at the Council on Foreign Relations, wrote in Diplomatic magazine before PDD reports earnings. “As a result, the Chinese economy risks becoming trapped in a vicious cycle of falling prices, insolvencies, factory closures and ultimately job losses.”
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