China actually wanted to achieve growth of 5.5 percent. The 3.0 percent it got is the lowest value in over four decades – with the exception of the pandemic year 2020. Vice Premier Liu He announced economic progress on Tuesday at the World Economic Forum in Davos.
These should come about in particular by unleashing domestic demand in the country with its billions of people. The government can hope for catch-up effects: After almost three years of a strict corona virus regime, it is assumed that household consumption will increase sharply.
Doubts about returning to old strength
Overall, however, experts are less optimistic: Although growth rates of around five percent are expected again, China will find it difficult to regain the levels of 8.4 percent seen in 2021. The former growth engine of the world will permanently develop significantly less traction, it is said.
The current biggest question mark is the coronavirus situation in the country. Liu said in Davos that the situation is now under control. “China has passed the peak of infections,” he said in Switzerland. It is only a short period of time from the peak of the infections to the return to normality.
Did you really survive the coronavirus?
In December, under the impression of the sluggish economy and after protests critical of the government, the communist leadership announced an abrupt departure from its strict zero-Covid policy. The result was an enormous wave of infections, since the population – unlike in other countries through vaccinations and previous infections – has hardly built up any immunity.
After criticism, China only revised the number of deaths sharply upwards at the weekend since the easing, to almost 60,000 deaths between December 8, 2022 and January 12, 2023 alone. But there are also doubts about these numbers: doctors reported to Reuters that they had stopped not to write respiratory failure after Covid-19 disease on the death certificate as the cause of death.
It seems unlikely that China has solved the problem with an infection within a few weeks. Millions of Chinese are traveling through the country for the New Year celebrations on January 22, and the situation is expected to worsen again.
Real estate crisis not over yet
The crisis in the real estate sector, which together with the construction industry contributes more than a quarter of the country’s economic power, is also not over yet. The industry has been in crisis since Beijing regulated lending and speculation in 2020. That rocked real estate giant Evergrande, which is saddled with debt and unable to keep its construction promises.
Several other large companies threatened to be swept away. In November, the Chinese government announced large government cash injections for the real estate sector, and since then there has been hope, including among western investors, that the sector will become lucrative again.
Smaller companies in trouble
The “Financial Times” in turn pointed out that small and medium-sized enterprises, the latter count as companies with up to 1,000 employees, are a key factor in the upswing. And there are also problems there at the moment, according to the newspaper. Companies are responsible for more than 50 percent of economic output and tax payments.
But mainly due to the pandemic measures, many companies are in crisis. This has been tightened because many regions and cities have increased non-wage labor costs, especially social security contributions. Wages themselves have also risen more recently, based on wage increases in the public sector.
But the big companies, especially tech factories, are also struggling. Due to the increasing political polarization between China and the West, the first US companies in particular are relocating their production to other countries, particularly to Vietnam.
There is already a shortage of workers
Conversely, some factories are already experiencing a foretaste of what is likely to be China’s biggest challenge: labor shortages. China still has millions of unemployed young people on paper, but 80 percent of all factories have already had labor shortage problems in the past year, Reuters reported, citing a survey by CIIC Consulting.
Also on Tuesday, the national statistics bureau announced that China’s population has shrunk for the first time since the Great Famine 60 years ago. The number of citizens at the end of 2022 was 1.41 billion, around 850,000 fewer than in the previous year. It also marks a turning point for the economy: “China’s demographic and economic prospects are much bleaker than expected,” said population development expert Yi Fuxian of the new data.
“Demographic time bomb” is ticking
The one-child policy from 1980 to 2011 is considered to be the main reason for this development. But with increasing prosperity, fewer children were born – as everywhere else in the world. In addition, the high cost of education discourages many Chinese from having more than one child, or having children at all. The government’s strict zero-Covid policy further aggravated the situation.
The “demographic time bomb is starting to tick,” wrote the Asia Times. And the “New York Times” also gave several reasons why the development is dangerous for the economy – and thus also for China. With comparatively low birth rates in recent decades, there is a risk that the population will age rapidly. This is an enormous challenge for the state pension system – with a very low retirement age of mostly around 60 years – and also for the health system.
Need a new economic model?
Fewer people also mean less domestic demand – and that applies not only to classic consumer goods, but also to the real estate sector. But the biggest problem is probably the labor shortage if China maintains its economic structure.
“For years, China’s vast working-age population drove the global economic engine and provided the factory workers whose cheap labor produced goods that were exported around the world,” the newspaper wrote. However, there could soon be a lack of workers for such an economic model.
So China would have to try to develop other economic sectors that are less dependent on intensive personnel deployment. However, such a total restructuring of the economy seems difficult – also because the country would have to look for a completely new role in the world economy.
