China’s economy is facing a growing risk of a prolonged recession, fueled by deflation, a struggling property sector, and declining consumer confidence. Recent data from the National Bureau of Statistics of China indicates that the country is experiencing deflation, with price levels falling for the second consecutive year in 2024. This trend puts China on track for the longest period of economy-wide price declines since the 1960s, raising concerns about the nation’s economic stability.
The deflationary pressures are compounded by other significant challenges, including the collapse of the property sector and potential trade disputes with the United States. Furthermore, demographic issues and a substantial debt overhang are contributing to widespread public apprehension regarding the economy and its leadership. These factors have created a climate of uncertainty, making it difficult for the government to stimulate economic growth.
A key issue is the imbalance between investment and consumption in China’s economic model. Historically, China has relied heavily on investment in infrastructure, property, and manufacturing to drive growth. However, household consumption has been constrained by policies such as limited rights to move for work and a discriminatory social security system. This has led to high savings rates and a reluctance to spend, exacerbating the deflationary pressures.
The Chinese government’s adherence to its established economic model, characterized by extensive state control, limited free-market activity, and centralized leadership, is seen as a contributing factor to the current economic challenges. This model has historically fueled economic growth but has also created structural imbalances between investment and domestic consumption. Shifting the focus from investment to consumption is crucial, but restoring confidence and encouraging spending remains a significant hurdle.
Under the leadership of Xi Jinping, the government has continued to prioritize an export-oriented policy. In 2023, investment accounted for 41.1% of China’s nominal GDP, compared to a global average of 24%. Meanwhile, consumption represented 56% of GDP, significantly lower than the global average of 76%. This imbalance, coupled with a record trade surplus of US$992 billion in 2024, could lead to trade tensions with countries like the United States, further destabilizing the Chinese economy.
The government’s efforts to stimulate economic recovery have yielded limited results. Youth unemployment remains high, exceeding 17% since July 2024. Moreover, China’s household savings rate has surged to 55% in 2024, the highest level since 1952, indicating a lack of confidence in the economy. This trend is further compounded by the rapid aging of China’s population, which will make it challenging to boost domestic consumption and manage the country’s mounting debt in the coming years.
Xi Jinping’s administration has signaled a commitment to maintaining state control over the economy, moving away from market liberalization and reinforcing state-led development and industrial policies. This approach has negatively impacted the private sector, with the share of private enterprises among China’s largest listed companies declining significantly. Additionally, foreign direct investment has dropped, reflecting a lack of confidence among international investors.
The Chinese government faces the challenge of addressing these deep-seated structural issues to avoid a prolonged recession. Restoring confidence, encouraging household and business spending, and rebalancing the economy towards consumption will be critical steps. However, the government’s current policies and the existing political climate may hinder these efforts, making the path to economic recovery uncertain.
Furthermore, the ongoing anti-corruption campaigns and centralized governance have stifled innovation and limited the autonomy of local governments, hindering their ability to implement effective economic reforms. These factors, combined with increasing surveillance and restrictions on freedom of expression, have created an environment that is not conducive to economic dynamism and growth.
While the official GDP growth figures may paint a positive picture, independent researchers estimate that the actual growth rate is significantly lower. This discrepancy highlights the need for a more transparent and accurate assessment of China’s economic performance. The coming years will be crucial in determining whether China can overcome these challenges and avoid a prolonged period of economic stagnation.
