On September 7, 2023, the Peterson Institute for International Economics (PIIE) held a virtual event to discuss the short- and medium-term outlook for China’s economic growth. Titled “What’s next for China’s economy?,” the event occurred under the background of weeks, if not months, of renewed U.S. media, governmental and congressional attention to China’s domestic economic situation and challenges. Three panelists joined the discussion: Nicholas R. Lardy, PIIE nonresident senior fellow; Tianlei Huang, PIIE research fellow and China program coordinator and Adam S. Posen, PIIE president. Mary E. Lovely, Anthony M. Solomon Senior Fellow at PIIE and the previous Carnegie Chair in U.S.-China Relations at the Library of Congress, moderated the discussion.
Approaching China’s current economic status from three different angles, the three panelists introduced three distinct takeaways regarding China’s economic prospects. After taking a close look at recent data, Nicholas Lardy challenged the view that China’s economy will enter a period of persistent and sharp decline. According to Lardy, China’s wages and disposable income has grown at a faster rate than its GDP, while the relatively strong growth of consumption seems inconsistent with the narrative of falling confidence. Lardy also argued that some of the data cited as evidence for China’s potential economic downturn could have other explanations or interpretations. The large addition of household deposits belies the fact that the share of disposable income that went into deposits declined in the first half of 2023. The decline of China’s total imports in dollar value contrasts import growth in volume terms and could actually signal rising demand. The Consumer Price Index (CPI) decline in July may mostly result from the decrease in pork price as the industry recovers from an earlier swine fever. Similarly, the decline of China’s private investment was likely caused by shrinking property investment, as private investment outside of the property sector in fact grew in the recent quarters.Lardy concluded that, given the current data, China’s economic growth rate likely won’t continue its downward trend over the next 2-3 years, although more data and observations are always needed to shed more light into China’s domestic economic condition.
Meanwhile, Tianlei Huang examined the role of China’s real estate sector in its economic slowdown and argued that it will “continue to drag on China’s growth for many years to come.” Given structural reasons such as slowing urbanization, existing overinvestment in the real estate and shrinking property demand caused by China’s shrinking population, China’s real estate will likely continue to contract and play an increasingly smaller role in China’s economy. According to Huang, the shrinking rate of real estate investment has already contributed to a contraction of overall private investment and decline in goods and retails related to real estate.
Accordingly, Huang argued that “the current housing downturn and vulnerability of local government finances exposed during the housing downturn…may turn out to be a good opportunity for China to start a new round of privatization campaign,” as it could help raise government revenues, revive the private sector and reduce deficiency in resource allocation. Huang noted, however, that such an approach may not be politically feasible under the current political leadership.
Next, looking at policy and private sector behavior changes in China, Adam Posen argued that China is at a “macroeconomic turning point” as the government significantly increase its
“arbitrary interference in everyday commercial life” since 2015—not limited to, but embodied and highlighted by the zero-COVID policy. In response, households and small and midsize enterprises (SMEs) have shifted to prefer self-insurance and liquidity and, consequently, move away from investment and durable goods consumption. According to Posen, the popularity of “interventionist” policy has caused weaker reactiveness to government-led stimulus and a less vibrant private sector. This may in turn lead the Chinese government to depend more on state-owned enterprises (SOEs) and increase financial barriers, which would further encourage investment to exit China. Posen suggested that Washington should utilize this opportunity to “reorient” its economic policy on China and shift the focus from sanctions towards the “suction” of capital and resources from China; just as the United States did to fascist countries in the 1930s and then to the Soviet Union. Finally, Posen warned that China’s economic downturn would be persistent and could make China more aggressive on the security front.
During the Q&A section, the panelists generally agreed that China’s economy is facing a number of long-term challenges. In particular, the panelists agreed that foreign investment in China has been declining, which Huang and Posen highlighted as a red flag and potential “wake-up call” for China. Meanwhile, Lardy noted that U.S. Secretary of Commerce Gina Raimondo’s recent comment about China’s investability was largely a talking point to push for further opening up and liberalization in China in accordance with long-lasting U.S. tradition and interests. Lardy also cautioned that anecdotal evidence and media reports may not accurately capture China’s economic condition, pointing out, for example, that the U.S. economy also has good numbers right now but that reporters will likely get negative responses when interviewing Americans about U.S. economic prospects. Looking forward, Huang and Posen would keep a close eye on China’s policy responses both to the real estate crisis in particular and to the general decline of foreign investment as well as to the effectiveness and private sector reactions to these policies.
