Is China Facing Economic Strains Affecting Its Growth?

What distinguishes China from most other countries is how fast that debt has accumulated relative to the size of its economy.

5 mins read
Trucks transport containers at Qingdao Port, east China's Shandong Province, Feb. 11, 2024. (Xinhua/Li Ziheng)

XI JINPING’S ADDRESS TO CCP TO CURB CORRUPTION

In January 2024 XI-Jinping addressed the Communist Party of China and gave a moralizing speech on how to curb corruption which, according to him, is constraining the growth of China. Today China is the fastest-growing economy in the world, though far behind the USA. According to The New York Times report (July 2023), China and the United States are locked in an increasingly intense rivalry when it comes to national security and economic competition, with American leaders frequently identifying China as their greatest long-term challenger. Yet the world’s two largest economies, which together represent 40 percent of the global output, remain integral partners in many ways. They sell and buy important products from each other, finance each other’s businesses, provide a home to millions of each other’s people and create apps and movies for audiences in both countries.

USA-CHINA ECONOMIC COMPETITION

The U.S. economy continues to outstrip China’s by dollar value: In 2022, the Chinese gross domestic product was $18 trillion, compared with $25.5 trillion for the United States But China’s population is more than four times America’s. And the economic picture looks different when adjusted for local prices: Based on purchasing power parity, China’s share of world GDP is 18.9 percent, according to the IMF surpassing the United States at 15.4 percent. China has provided more than a trillion dollars for global infrastructure through its Belt and Road Initiative which analysts see as an effort to project power around the world. The rapid growth and modernization of China’s military have sparked concerns in the United States. China has more naval vessels than the United States and more military personnel.   

But American armed forces are far better equipped, and the United States still spends more on defense than the next ten countries combined.  Despite the rising tensions, trade between the countries remains extremely strong. China is America’s third-largest trading partner after Canada and Mexico imports of goods and services from China hit a record $563.6 billion last year. But the share of U.S. imports that come from China has been falling, a sign of how some businesses are breaking off ties with China. The U.S.-China Business Council estimated that U.S. exports to China supported nearly 1.1 million jobs in the United States in 2021 China dominates supply chains for both critical and everyday goods. It is the world’s largest producer of steel, solar panels, electronics, coal, plastics, buttons, and car batteries, and it has quadrupled its car exports in just two years, becoming the world’s largest auto exporter through its growing clout in electric vehicles

US EXPANDS SANCTION ON CHINESE COMPANIES ON NATIONAL SECURITY AND HUMAN RIGHTS CONCERN

The United States has steadily expanded sanctions against Chinese companies and organizations because of national security and human rights concerns, placing many Chinese companies, organizations, and people on an “entity list” that restricts their ability to buy products from the United States. In another report, the New York Times explains that China, which has lent nearly one trillion to some 150 developing countries, has been reluctant to cancel large debts owed by countries struggling to make ends meet. That is at least in part because China is facing a debt bomb at home: trillions of dollars owed by local governments, their mostly off-the-books financial affiliates, and real estate developers. 

What distinguishes China from most other countries is how fast that debt has accumulated relative to the size of its economy. By comparison, in the United States or even deeply indebted Japan, debt has risen less precipitously. The steep increase in China’s debt, more than doubling compared with the size of its economy since the global financial crisis 15 years ago, makes managing it harder. China’s lending to developing countries is small relative to its domestic debt, representing less than 6 percent of China’s annual economic output. But these loans are particularly sensitive politically.

HOW CHINA GOT INTO DEBT HOLE

Despite heavy censorship, periodic complaints emerge on Chinese social media that banks should have lent the money to poor households and regions at home, not abroad. Accepting heavy losses on these loans would be very unpopular within China. China got into this debt hole with real estate, which suffers from overbuilding, falling prices, and beleaguered potential buyers. In the past two years, several dozen real estate developers who borrowed money from overseas investors have defaulted on those debts, including two more in recent days.

Developers have struggled to continue paying far larger debts to banks inside China. For any government or business, borrowing can make good economic sense if the money is used productively and efficiently. However, borrowers who binge on debt that doesn’t generate sufficient returns can get into trouble and struggle to repay their lenders. That’s what has happened in China. As its economy slows, a growing number of local governments and their financing units are unable to keep paying interest on their debts.

The ripple effect means many localities lack money to pay for public services, health care, or pensions. Debt troubles have also made it hard for banks in China to accept losses on their loans to lower-income countries. Yet many of these countries, like Sri Lanka, Pakistan, and Surinam now face considerable economic difficulties. While it is difficult to control corruption through lectures on morality and sending party goons after the corrupt Xi- Jinping’s admonition is not likely to have much real effect as many in the CCP high-ups are on the take and difficult to catch in the act.

BRI IS FAVOURED BY DEVELOPING COUNTRIES DUE TO NEED FOR INFRASTRUCTURE DEVELOPEMENT

A China Daily op-ed comment on Xi-Jinping’s address on BRI President Xi’s speech at the Belt and Road Forum shows that efforts are being made to improve the initiative through, for instance, achieving breakthroughs in technological innovation and increasing investment in green development. For the initiative’s sustainable development, more attention should be paid, among other things, to increasing production capacity and improving industrial facilities, because increased investment in green development will radiate far more widely and greatly to influence new industrialization and urbanization.

And green-oriented innovation should be promoted, to balance economic growth, environmental protection, and social justice. Better protecting the environment and pursuing sustainable development can mitigate climate change. However, the level of industrialization to be achieved and the ways to deal with economic and environmental problems differ from country to country. Ever since the advanced countries achieved industrialization, the tertiary industry has been playing an increasingly bigger role in their economic structure and growth. However, the vast majority of developing countries are yet to realize industrialization. Also, developed and developing countries pursue green development, following different standards, methods, and measures to achieve different goals.

This is to say there are different criteria, methods, and measures for green technology, infrastructure, energy, and transportation. There cannot be just one set of criteria, certainly not those dictated by the United States or the West. Therefore, the international community needs to hold more talks to explore more standards and methods, with every country having the right to adopt the development model that best suits their national conditions. Given the rich experiences the developing nations have accumulated in fields such as social development, they should have more say in what kind of technology or standard should be used to promote green development. And the green action plan can be China’s contribution to global development. Developing countries hope that China will continue with BRI projects despite Western criticism of the Chinese debt trap.

Kazi Anwarul Masud

Kazi Anwarul Masud is a retired Bangladeshi diplomat. During his tenure, he worked in several countries as the ambassador of Bangladesh including Thailand, Vietnam, South Korea and Germany

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