As President Xi Jinping is expected to confirm his third term in office, data on the Chinese economy indicates he may have many challenges to tackle as the country's growth seems to have lost steam.
The 20th National Congress of the Chinese Communist Party (CCP) is scheduled to be held October 16. During the week-long event, Xi is expected to be approved as the party's leader for an unprecedented third term.
The Party Congress will also elect its central committee and will set the tone for China’s relations with the rest of the world.
The Chinese economy is going through a tumultuous period, making the upcoming Party Congress even more significant and closely monitored across the globe. While Xi is all set to consolidate his political power further, a weakening economy could cause him some headaches.
"Our party must be united to lead the people to face major challenges effectively, defend against major risks, overcome major barriers and resolve major contradictions. We must press on with great struggles under new historical characteristics," wrote the Chinese president in an article published in the party journal, Qiushi, on October 1.
The Chinese economy contracted by 2.6 percent in the second quarter of CY 2022 ending in June, compared with 1.4 percent growth registered in the quarter before. On a yearly basis, this is a weak growth of 0.4 percent, down from the first quarter’s 4.8 percent. The Q2 growth, which has led to a GDP of RMB 29246.4 billion (USD 4112 billion) for the quarter, is much lower than the official target of 5.5 percent growth on a yearly basis.
Zero-COVID policy
Xi's controversial zero-COVID policy has been blamed as one of the major factors behind this slowdown. Various economic hubs in the country were under lockdown under the policy, leading to disruptions in manufacturing, mass lay-offs and losses to the private sector.
"In our view, the biggest risk to growth is the zero-COVID policy. The resulting uncertainty has hurt production and supply chains, mobility, and especially capital goods and consumer sectors," said a report by BNP Paribas Asset Management.
According to a Goldman Sachs estimate, districts designated as middle and high-risk virus areas which face some form of COVID-19 restrictions exceed 30 percent of China’s GDP.
Falling trade
Official data shows a steep fall in Chinese exports in August, compared to a year before.
China's export growth, on a yearly basis, stood at 7.1 percent August this year. This is much lower than the 18 percent growth recorded in July. Meanwhile, imports grew only 0.3 percent in August, compared to the 2.3 percent rise in July.
Along with disrupted industrial activity due to the recurring lockdowns in major economic hubs, a decline in global demand as energy prices soared in Europe and the threat of recession looming in the US were also factors behind this fall in trade.
Small businesses suffer
Small businesses appear to have faced the brunt of China's slowdown. According to a report by Hong Kong-based daily South China Morning Post, as much as 4.37 million of China’s small businesses shut down between January 2021 and November 2021. This is more than three times the 1.32 million small firms registered during the same period.
"This is important because small and medium businesses represented about 80 percent of China’s urban jobs in 2013—overwhelmingly in the service sector. Notably, employment in that sector grew more slowly than in the industrial sector last year for the first time since 2012," said the Atlantic Council in a recent report, citing data from the International Monetary Fund.
Rising youth unemployment
There has been a significant rise in unemployment among China's youth. The youth unemployment rate in the country has gone up from 14.6 percent in September 2021 to 18.7 percent in August 2022, according to data from the National Bureau of Statistics of China.
The youth unemployment rate for July (19.9 percent) was the highest it has ever been since the Chinese government began releasing the official data for the same in 2018. The crackdown on tech companies seems to have only exacerbated the situation.
Real-estate sector tumbles down
The downturn in China's economy reflects on its property sector, which has slumped since the pandemic. The downfall is particularly worrying, as the sector contributed as much as 29 percent to China's GDP, according to a 2020 estimate, and it is a key driver of growth, according to the US National Bureau of Economic Research.
While growth in investments in the real-estate sector stood at 8.8 percent in September 2021, by August 2022, it had contracted by 7.4, shows official data.
Trouble in the banking sector
The crisis in the real-estate sector seems to have impacted China's banking sector as well.
The total consolidated non-performing loans (NPLs) of China's top four lenders--Bank of China, China Construction Bank, Agricultural Bank of China and the Industrial and Commercial Bank of China--attributed to the real-estate sector stood around $19.12 billion.
This is more than a 51 percent increase from the year before when the number of NPLs in the sector stood at $12.63 billion for the four banks.
Mortgages, which are generally considered as a safe asset for the bank, have also become riskier, as homebuyers are increasingly defaulting amid a nation-wide 'mortgage strike' against unfinished homes.
Mounting debts
According to official data, China's external debts have gone up from $1.9 trillion in Q1 of 2019 to $2.6 trillion in Q2 of 2022. At present, this accounts for as much as 250 percent of China's GDP.
The country's external and domestic debt situation could worsen if the government resorts to stimulus packages to solve the current economic crisis, say analysts.
"If the economic situation gets bad enough, China may once again be forced to engage in large-scale stimulus. However, another huge run-up in debt would likely put unsustainable financial pressure on many local governments. The central government can no longer spare its own balance sheet if it wants to both stimulate the economy and keep local governments solvent," said a report by Seafarer Capital Partners.
The country, which is also the world's largest creditor, has had to slow the pace of giving out loans due to mounting troubles in the domestic economy and the economies of its debtors.
'Taiwan a low-hanging fruit to distract the public'
If China's economic hardships worsen in his third term, Xi might attempt to draw public attention to other issues such as Taiwan, say experts.
"Unlike his predecessor Hu Jintao, President Xi is an ambitious man who constantly feels the need to demonstrate his infallibility. This desire is not only in his nature, but is dictated by the immense pressure he is under – and the more he centralises power in his own hands, the greater that pressure becomes," said Junhua Zhang, a senior associate at the European Institute for Asian Studies, in an analysis piece published by the Geopolitical Intelligence Services.
"Once President Xi is re-elected, the uncertainties regarding China’s economy and foreign policy will multiply. If the economy falters, he will want to draw the country’s attention to other issues. Taiwan is the low-hanging fruit here. For at least the next three years, however, retaking Taiwan by force will prove too costly for China," he added.
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