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China has problems on its economy

This year, India became the most populated country in the world. With an estimated 1.43 billion, it overtook China, whose population shrank for the first time in six decades, falling by 850,000 to 1.41 billion, and is predicted to fall below 1 billion by 2100. As a result, the working age population will decrease by more than 40 million, meaning there will be many challenges for the growth of the economy, the sustainability of the elderly system and balancing the public finances.

The Communist Party of China enforced the one-child policy in 1979, when it was a very poor country, fearing social unrest due to mass overpopulation. However, with the stabilization of the population during the 00s, China allows since 2015 couples to have up to three children , and in some provinces, like Sichuan, there are no limits currently.

Nevertheless, the demographic trend will continue to be downward, as 30% of young Chinese have negative views on marriage and children. This has caused the fertility rate to fall to 1.09 from 1.15 in 2021, way below the 2.1 needed to keep the population stagnant. This is also lower than Japan's rate for the same time period of time (1.3) and only slightly higher than South Korea’s, which has the lowest in the world (0.9).

China is barely growing at 5% per year in the last decade, which is much lower than the 10% that China experienced on average between 1985 and 2000. In addition to the natural limits of GDP growth and decreasing returns for any economy, the Chinese government established since the global crisis of 2007-2008 that the construction sector should be the most important economic drive, giving a lot of advantages to families, local governments and companies to build almost 18 million units every year. 

When current president Xi Jinping took the power in 2012, he voiced that the “East is rising as the West declines", accusing the US of being the largest source of “chaos” in the global economy. But those internal market-driven policies that appeared to be successful in 2008 are now affecting China. Real estate companies got massively indebted with the belief that the government would always step in to finance this sector, which now accounts for 25% of the country's GDP. At the same time, this overinvestment has provoked that now 20% of residential buildings are empty and the real estate bubble is bursting with effects in all the economy.

The Communist Party has established some measures against the previous growth model that was based on excessive financial leverage. There are now strict limits on the amount of debt that can be created, so many companies are currently suffering from a lack of liquidity and access to loans. Due to these restrictions, the real estate company Evergrande, one of the largest entities in the country, filed for bankruptcy, and this is already causing a credit crunch that has damaged new economic projects and the viability of many companies. 

In addition to that, the effects of the Zero-Covid policy and more protectionist policies developing around the world, specially the ones coming from the US since the Trump era, are cooling down the Chinese economy. China’s consumer price index (CPI) was only up by 0.1 per cent in August, producer price index (PPI), which reflects the prices that factories charge wholesalers for products, has been around -5% in the last 12 months.

While exports fell in August by 8.8%, year on year, for the fourth consecutive month of decline, according to official statistics. In short, the Chinese economy is showing many signs of deflation and stagnation, like the ones Japan experienced in the 90s, called also The Lost Decade.

Among many effects, this downturn caused youth unemployment to reach a record 21% in June, before the Chinese government suspended the publication of these figures citing a revision to the surveying methodology. But external analysts suspect the real number could be around 50%.

Furthermore, foreign direct investment has fallen 10% in the last 12 months: Experts point to recent moves by the Chinese authorities like police raids on international consultancies and expanding the use of exit bans targeting foreign business people for "national security reasons".

Others include regulatory crackdowns on growth sectors like gaming, mobile payments or private tutoring. The latest case has been the Communist Party barring Chinese government officials and employees at state-owned enterprises from using iPhones. This is probably a response to similar US laws against the use of Tik-Tok and Huawei by public servants in certain cases.

China's expansion as a world superpower based on economic growth and international cooperation seems complicated ahead. Taking into account that the Communist Party does not seem to want to relax at all the rigidity of its authoritarian political system, its future will surely have enormous political, military and economic challenges.


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