What is wrong with the Chinese economy?

After the first half of 2023 China’s growth figures and youth unemployment rate were announced, I focused on the question of what is wrong with the Chinese economy. In June, the youth unemployment rate between the ages of 16 and 24 reached a record high of 21.3 percent. During the same period, the unemployment rate for urban residents was 5.2 percent. In March, the Beijing administration had set a growth target of approximately 5 percent for 2023. In the first quarter, China grew by 4.5 percent and this momentum was expected to continue in the second quarter and grow by 7.3 percent. But the expectation did not materialize. In order to obtain their opinions and to find out how their businesses were doing; I have started asking my Chinese friends around me. Although some of the answers I received matched the indicators, it took me a while to figure out the source of the problem. One of my friends who works in the chemical industry was unhappier than he was two years ago and painted a pessimistic picture that things were not going well at all and would get worse. A Chinese friend, who had just started a new venture in design, painted a picture that his business was doing worse than he expected and that the companies he was negotiating with did not want to make new investments. My third friend made a comment that helped me understand the problem in the Chinese economy. He said that the main problem in China is the decline in domestic demand.

Savings are increasing and luxury consumption is decreasing in China

The consumption patterns of 1.4 billion people in China are undergoing a significant change. After the removal of the Covid19 travel barriers, I thought the Chinese economy would show significant growth, particularly with people coming to China from abroad to trade. But there was a point that I forgot in this view This was the demand behavior on the domestic market. The Chinese people still have money in their deposit accounts, and it is even growing. In 2020, Chinese domestic savings totaled 93.44 trillion yuan, it was 103.3 trillion in 2021, and it reached 120.3 trillion yuan (about $17.116 trillion) in 2022. A further 12 trillion Yuan was added to these savings in the first half of 2023. This is more than the increase in the whole of 2021. In short, people in China prefer to save rather than consume, thus creating a contraction. Especially in China, the decline in luxury consumption or the decline in demand creates an important change. Because the decrease in demand for luxury goods on the domestic market leads to an increase in unemployment. For example, the sales figures of Maotai, the most expensive brand of Baijiu (Chinese alcohol), have dropped significantly. Maotai is one of the most expensive drinks in China and a small bottle cost 10,000 RMB (about $1392). Since 2022, sales of not only Maotai but also all other luxury baijiu brands have dropped dramatically. But people have not stopped drinking alcohol, they have replaced it with cheaper alcohol products and the demand for luxury has decreased. Okay, but what does this have to do with alcohol? Baijiu is a special drink that is an integral part of various celebrations such as holidays, weddings, business dinners, etc. for rich or middle-class people in China, or as a gift to friends.

Chinese people’s penny-pinching has hit all the entertainment, culture and sports sectors. According to data from the Guangdong Provincial Bureau of Statistics last year, from January to October 2022, Guangdong’s fixed asset investment in culture, sports and entertainment decreased by 7.7 percent, wholesale and retail trade by 8.2 percent, accommodation and catering by 18 percent, and agriculture, forestry, animal husbandry and fishery by 20 percent. Compared to 2021, the culture, sports and entertainment sector grew by 5.5 percent, wholesale and retail trade by 2.3 percent, accommodation and food service by 35.6 percent, and agriculture, forestry, animal husbandry and fisheries by 36 percent. However, considering that there are strict Covid19 travel barriers in China in 2021, growth in 2023 is quite normal, but investments will stop shifting to this area. These are all areas where private investment and entrepreneurship are concentrated, so it is clear that China’s small and medium-sized enterprises have decided to adopt a risk-tolerant financial management from 2022 onwards, no longer investing abroad and seeking stability through savings. In 2023, extravagant and unnecessary spending on liquor, jewelry, nightclubs, fine dining, etc. all took a heavy hit.

The picture for the Chinese economy is brighter than for Europe and the U.S.

Currently, the China CPI is close to zero. It was 0.2 percent in May and June, 0.1 percent in April, and 0.7 percent in March. In the first half of 2023, the U.S. economy grew by 2 percent and CPI increased by 0.1 percent in May and 0.2 percent in June. In Germany, CPI realized 0.3 percent in June, while 0.2 percent growth is expected at the end of the year. When both CPI and growth data of China are analyzed, it is seen that the figures are more favorable compared to developed countries such as the U.S., the UK, Japan and Germany. Although the demand for luxury in China is decreasing, other data are still positive. In the automobile market, the data is where it should be. For example, in the first half of 2023, vehicle purchases increased by 9.8 percent year-on-year to 13.24 million units. China’s electric car prices are not cheap, but car purchases are not affected. Car sales in China are expected to reach 27.6 million this year and electric vehicles are expected to sell around 7 million. On the other hand, the real estate market in China is shrinking. People are not inclined to buy houses. As a result of overcapacity in the real estate market, one third of all new homes remained unsold in China in 2022. This is due to the fact that real estate prices are constantly rising in the big cities and it is clear that there is not a big return on buying a house.

China is part of the world and is indirectly affected by global demand contraction. For example, global smartphone shipments for 2023 are expected to be 1.16 billion, down 2.8 percent from 1.2 billion in 2022. In the second quarter of 2023, worldwide shipments of personal computers fell 13.4 percent to 61.6 million units, marking the sixth consecutive quarter of declines. On top of these, economic problems at the global level have led to lower-than-expected growth. China’s household confidence is being shaken by the combination of Covid19 measures, global economic and geopolitical risks. To summarize, people in China are not experiencing a financial slump, but they are saving and shunning luxuries. In addition, rising unemployment and weak investment are also creating a decline in demand from Chinese households. If this saving and spending continues for a long period of time, it may cause a wound in the Chinese economy. Weak demand in China is likely to push the economy to the brink of deflation. The lackluster performance in key sectors such as retail, real estate and industrial production has increased pressure on the government to implement further economic stimulus measures. The impact of Covid19 measures, regulatory pressures and geopolitical risks have exacerbated the situation and broader economic policy seems necessary. A much more ambitious economic policy focusing on stimulating consumer demand, including expansive fiscal policy or tax cuts for households, will be necessary. Global consumption has started to decline. But China, as a major producer, is still more likely to weather this with less damage.

Necati Demircan
Necati Demircan
Necati Demircan is a PhD candidate in Global Studies and research assistant of Center for Turkish Studies at Shanghai University. He is editor of the Belt & Road Initiative Quarterly. His articles were published by the Aydınlık newspaper, China Daily, and Hankyoreh. His research interests mainly focus on Chinese and Turkish foreign policies