China this week said that its economy grew by 5.2 percent in 2023. And while this surpasses the official 5 percent target, the country is facing challenges as analysts and investors raise concerns.
China's recovery after opening up from its zero-Covid policy has been marred by a deepening property crisis, deflationary risks, and subdued demand; besides other factors such as a recession and joblessness, Reuters reported.
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Expectations of a strong post-COVID rebound in the world's second-largest economy waned amid weak consumer and business confidence, mounting local government debts, and as global economic slowdown weighed on jobs, activity, and investment. China Beige Book International's survey noted a disappointing recovery from COVID-19, suggesting the need for major global upside surprises or more active government policies for acceleration, the report said.
Gross domestic product (GDP) for October-December accelerated to 5.2 percent, surpassing the third-quarter figure but falling short of a 5.3 percent forecast. However, on a quarter-by-quarter basis, GDP growth slowed to 1 percent. December indicators revealed a deepening property crisis despite government support, with retail sales growth slowing and investment remaining tepid, while industrial output showed modest improvement.
China's historical success, marked by substantial growth since the 1980s, is facing a transformative shift. The previous model of massive investments in manufacturing and infrastructure is now overshadowed by increasing debt levels. Regulatory crackdowns and a shift towards high-skilled jobs in the services sector add to the challenges faced by the workforce.
Despite China's 5.2 percent growth last year, there's a growing sentiment of recession among the population. Professor Zhu Tian from China Europe International Business School told Reuters that the traditional definition of a recession may not fully capture the challenges faced by a developing country with significant annual investments.
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As China grapples with a multifaceted economic challenge marked by rising unemployment, property market struggles, and external pressures, concerns are increasing about the nation's economic trajectory.
Analysts expect Beijing to maintain a growth target of around 5 percent for the current year, but challenges such as the property crisis and structural issues pose hurdles. NBS' Kang Yi told Reuters the 2023 growth was hard-won, but highlighted a complex external environment and insufficient demand in 2024.
Real estate data in December indicated a significant decline, with new home prices falling at the fastest pace in nearly nine years. Property sales and new construction starts also saw substantial drops, contributing to concerns about the property market. Debt-ridden developers delaying construction further weighed on consumer confidence.
With 96 percent of urban households owning at least one apartment, and 70 percent of savings invested in property, the real estate downturn is impacting household wealth and spending.
As businesses remained cautious amid uncertainties, the nationwide jobless rate increased to 5.1 percent in December. Youth unemployment, excluded from data for five months, stood at 14.9 percent for 16-24 year-olds, reflecting increased challenges for the younger workforce. To bring this into perspective, in June a staggering 100 million Chinese aged 16-24 – more than one in four were unemployed.
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The economic downturn, coupled with a property market slump, is contributing to a sense of despair among the younger generation. Surveys reveal that China's Generation Z is the most pessimistic age group. Job seekers are facing lower-than-expected salaries as businesses respond to poor domestic demand, leading to reduced opportunities and heightened economic concerns, as per another Reuters report.
Further, China's population declined for the second consecutive year in 2023, dropping by 2.08 million to 1.409 billion. This faster decline raises additional concerns about the country's long-term growth prospects.
Beyond domestic issues, diplomatic tensions with the West are contributing to China's first-ever foreign investment deficit. Trade bodies have expressed concerns over restrictions, raids, and exit bans, leading some businesses to consider moving overseas for stability.
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President Xi Jinping's increased focus on national security, particularly the recent crackdown on consultancies and due diligence firms, has left many foreign companies uncertain about potential legal boundaries.
Over the past year, borrowing costs for multinational companies have surged due to interest rate hikes by the US Federal Reserve. This increase has made parent companies of Chinese subsidiaries hesitant to boost their investment due to elevated borrowing costs in US Dollars.
Data released by China's commerce ministry reveals a significant contraction in foreign direct investment (FDI) into the country for the first time in over a decade, Reuters reported. In 2023, overseas companies invested $157.1 billion in the world's second-largest economy, marking an 8.0 percent year-on-year (YoY) decline. This downturn is the first observed since 2012.
Foreign firms have exhibited reservations towards China, especially following the abandonment of strict zero-COVID curbs in late December 2022. Worries regarding China's business environment, economic recovery, and political landscape have weighed heavily on the minds of foreign investors, the report noted.
Alicia Garcia Herrero, Chief Economist for Asia-Pacific at Natixis, told Reuters it would be a challenging year ahead. Expressing the need for China to open more sectors, eliminate forceful location constraints, and shut down some state agencies, she believes FDI is likely to continue its decline in 2024.
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Longstanding doubts about the accuracy of China's official GDP growth data have given rise to a demand for alternative calculations, gaining momentum this week as Beijing announced a 2023 economic expansion in line with its annual target of around 5 percent, Bloomberg reported.
Both official and independent estimates agree that a decline in real estate construction, along with challenges in local government finances and falling exports, exerted downward pressure on the world's second-largest economy.
One notable disparity lies in Beijing's investment data, indicating a surge in manufacturing and infrastructure spending. However, some experts, including Logan Wright from Rhodium Group, told Bloomberg that overall investment remained flat, suggesting a significant overstatement of China's 2023 growth, potentially around 1.5 percent.
Doubts about China's official investment statistics, measuring spending on housing, factories, and infrastructure, have been amplified by frequent revisions and a large adjustment in the latest data. Fixed asset investment (FAI) for 2023 implies a staggering downward revision of 7 trillion yuan, or 17 percent of total investment from the initially reported amount for the previous year.
China's economic challenges contrast with India's rising prominence as a potential global player, as per a Wall Street Journal report.
India's equity market has seen eight consecutive years of growth, benefiting from deteriorating trade relations between the West and China. Further, India's population overtook China's last year, with over half its citizens under 25. At current growth rates, it could secure the world's third-largest economy position in less than a decade, surpassing its former colonial ruler, the United Kingdom.
However, challenges lie ahead. While India has made progress, barriers to trade and challenges in becoming a global gadget assembly hub persist.
Among these is India's demographic landscape, which figures a significant youth population. It is however challenged in terms of integrating women into the workforce. Only a third of India's female working-age population participated in the labour force in the fiscal year 2022.
India's protectionist measures result in high import duties and the government's heavy debt raises concerns about sustaining progress without increased private-sector involvement. To bolster its geopolitical influence, India must attract FDI to boost the manufacturing sector. And while FDI hit record levels in 2020, recent signals show a dip in 2022 and 2023, posing challenges to achieving the official 25 percent GDP target for the manufacturing sector. India's ability to navigate these challenges will determine its trajectory in the years to come.
(With inputs from Agencies)
