Analytical Report; A Mirage Called China's 'Economic Miracle'

A decade ago, Xi Jinping's first reform programs seemed very bold as they predicted that by 2020, a Western-style free market economy based on consumption and services would prevail in China. His 60-point agenda aimed to reform an outdated growth model more suitable for less developed countries. Reuters reported in an analytical piece about the economic situation in China that now, in 2023, it seems that most of these goals have not been achieved, and China's economy still relies on outdated policies that have only added to China's massive debt accumulation and industrial overcapacity. According to many analysts, the most likely outcome of the failure to reform the world's second-largest economy is a Japan-style economic recession, but there is also a prospect of a more severe crisis that would have significant social and political costs for the Chinese government. When China emerged from its Maoist planned economy in the 1980s, it was in dire need of infrastructure, and economists believe that by the time of the 2008-2009 financial crisis, it had met most of its development needs. Since then, numerically, China's economy has quadrupled, but at the same time, China's debt has increased ninefold. Reuters added that to maintain this high growth, China doubled its investment in infrastructure and assets, which negatively impacted household consumption, resulting in weaker consumer demand in China compared to many other countries and concentrating job creation in industrial and construction sectors. This focus turned China's real estate sector into a quarter of economic activities and led local governments to rely so heavily on debt that they are now forced to seek financing. The COVID-19 pandemic, population decline, and geopolitical tensions have exacerbated these problems to the extent that China's economy has struggled to recover even after reopening post-COVID. The end of China's economic boom will harm commodity exporters and reduce inflation worldwide, threatening the living standards of millions of unemployed graduates and many whose economic situation is tied to real estate, jeopardizing social stability. Reuters also wrote that aside from short-term solutions, economists see three main options for China: first, a rapid and painful crisis that eliminates debts, limits excess industrial capacities, and deflates the real estate bubble; second, a decade-long process in which China gradually reduces excesses at the cost of lower economic growth; and third, a shift to a consumer-based model with structural reforms that will initially come with challenges but ultimately lead to faster and stronger growth. However, the point is that if the vast real estate market collapses uncontrollably and drags the financial sector down with it, a serious crisis will occur. Another point of tension is government debt, which the International Monetary Fund estimates at $9 trillion. Logan Wright, a partner at Rhodium Group, says Beijing must decide which part of this debt to save, as this amount is too large to provide full repayment guarantees, which the market currently assumes. According to this report, an active shift to a new economic model is also considered very unlikely given what happened with Xi's 60-point agenda. Nevertheless, avoiding a crisis or extending the reform period also carries its own risks, as youth unemployment has now exceeded 21%, about 70% of families have invested in the real estate market, and there is significant fear of short-term political and social risks. The United States and China have agreed to hold new trade negotiations. A Chinese construction giant has declared bankruptcy. Joe Biden's executive order limits U.S. investment in 'specific technologies' in China. Recent statistics indicate a decrease in China's imports from Russia. The White House announces details of the ban on U.S. technology investments in China.