Economists and investors had hoped that China’s economy would rapidly recover and experience a boom after the Chinese government lifted its “zero-covid” policy at the end of 2022. However, it seems that this may not be the case right now. China’s economy is experiencing a slow recovery as several economic indicators and metrics, such as local manufacturing, retail sales/consumption, and investment into the country, have not risen as expected.

Potential Causes

One potential cause of this slowdown is China’s property market. Before the pandemic, China’s property market was booming and turned into an unsustainable bubble which ultimately burst in 2021. This has had a ripple effect still felt to this day, largely due to the significant contribution of growth it has on the economy. As we know, real estate and asset price bubbles rarely end well.

In Japan, the 1990s asset price bubble burst just two years into the decade and made the economy enter into a phase known as the “lost decade” for two decades. China’s slowdown in its property market has led to depressed consumption, and many businesses in China largely use property as collateral for their loans. Therefore, it is likely to have cooled private investment.

Role of Central Banks

During Japan’s “lost decade,” the central bank was not fast enough to adjust its policies, causing the economic slowdown to prolong for such a long period of time. Japan’s central bank cut its rate to 0% only in 1999. Instead of encouraging consumption through handouts, it tried stimulating investments into the country, which, of course, did not work. Unfortunately, it looks like China will repeat the same mistake. The government remains focused on directing stimulus to investment instead of consumption, which has largely slowed down as homeowners are reluctant to spend money when their most valuable asset is losing its value. Not only that, the central bank is cutting rates by only a mere tenth of a percentage point at a time.

Furthermore, even if China’s central bank decided to focus on adjusting its policies in favour of increasing consumption, it would be easier said than done as the Chinese economy is largely export-led. Increasing household spending will take some time for it to be effective and seen.

Moreover, China’s trade tensions with the United States and other countries may also be a contributing factor to its slow economic recovery. The ongoing trade disputes have resulted in higher tariffs on Chinese goods, making them more expensive for foreign consumers and businesses. This could lead to a decline in demand for Chinese products and hurt the country’s export-dependent economy.

Conclusion

In conclusion, it remains to be seen whether China’s economy will recover to its former glory and grow rapidly as it did a few years ago. However, it seems that this will not be the case if they continue down the same path Japan did during the 90s. It is important for China to focus on developing its consumption-based economy and to avoid relying solely on investment in order to achieve sustainable growth in the long term.

China’s aging population is another factor that could contribute to the slow recovery of its economy. According to the United Nations, China’s population is projected to decrease by 31.4 million by 2050, and its working-age population is expected to decline by about 5 million annually. As a result, the country may face a labor shortage, which could further impact its manufacturing and service industries.

Overall, it is clear that China’s economic recovery is facing several challenges. To overcome these challenges, the country needs to focus on developing a more sustainable economic model that relies less on investment and more on consumption and innovation.