The likelihood of China descending into an exceptionally extended recession is growing.
Recent data from the National Bureau of Statistics of China indicates that its economy is undergoing deflation, with the price level decreasing for the second consecutive year in 2024. This sets the stage for the longest stretch of economy-wide price declines since the 1960s.
The convergence of the property sector collapse, a potential trade conflict with the United States, and challenges related to demographics and debt has led much of the Chinese populace to lose faith in both the economy and its leadership.
China is facing strong recessionary pressures, potentially long-lasting. The country has overly invested in infrastructure and now needs to pivot towards consumption to drive demand. However, consumer spending is weak due to traditionally high savings rates, exacerbated by deflation, declining property values, an aging population, and significant corporate and government indebtedness.
Exiting such a downturn will be challenging, particularly in restoring confidence and encouraging household and business expenditure. With local governments already heavily indebted, increasing public spending to stimulate demand could exacerbate economic disparities.
The current deflationary trend results from China’s enduring commitment to its economic model, characterized by extensive state intervention and control, along with limited free-market activity under authoritarian CCP leadership. This approach powered China’s rapid growth but led to a structural imbalance between investment and domestic consumption.
Historically, China has relied on investments in infrastructure, real estate, and manufacturing to sustain rapid growth and mitigate economic slumps. Household consumption has been restricted by inequitable policies and a biased social security framework, including limited migration rights for work, inadequate human rights protection, and low benefits for migrant workers.
From 1982 to 2012, investment rose from 32% to 46% of GDP, while final consumption fell from 66.6% to 51.1%. Though high investment rates modernized infrastructure and production technology, facilitating China’s emergence as an industrial powerhouse, they also led to significant overcapacity in key sectors, particularly after the 2008 financial crisis.
Under Xi Jinping’s leadership since 2012, China has maintained an export-driven strategy, with investment comprising 41.1% of nominal GDP in 2023 (compared to a global average of 24%), while consumption accounted for 56% (versus a global average of 76%). China logged a record trade surplus of $992 billion in 2024, possibly inciting trade barriers from Donald Trump that could further unsettle China’s economy.
Xi has resisted establishing a welfare state to boost consumer confidence, fearing it might promote complacency. Consequently, amid ongoing uncertainties, families have prioritized saving over spending, further depressing domestic consumption.
In Q2 2024, the central bank’s income confidence index fell to 45.6%, a decline of 4.4 percentage points from Q1 2022 when strict COVID-19 measures were enforced. The household savings rate soared to 55% in 2024, marking a significant rise from the previous year and reaching levels unseen since 1952.
Xi remains committed to reinforcing state economic control, veering away from market liberalization towards state-led development and industrial policy. Consequently, the private sector’s influence has waned, with private enterprises’ share among China’s largest listed companies plummeting from 55% in mid-2021 to 33% in mid-2024. Moreover, foreign direct investment fell by 27.1% in 2024, following an 8% drop in 2023.
The rapid aging of China’s population poses challenges to boosting domestic consumption and managing increasing debt over the next decade, with the pension system at risk of depletion by 2035.
Xi’s ongoing anti-corruption and “strict governance” campaigns have reverted China back to a more authoritarian regime, stifling local initiative and punishing dissent. Enhanced surveillance and suppression of reform and free expression resemble a rollback of the political reforms that fostered economic vitality and innovation in past eras.
Government stimulus efforts have failed to spur recovery, with youth unemployment remaining above 17% since July 2024.
While the economy may not technically be in recession, given no observed GDP contraction, growth has slowed significantly compared to the past forty years. The government reports a 5% GDP increase last year over 2023, yet Rhodium Group estimates it was between 2.4% and 2.8%.
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