Taipei, Taiwan – After starting 2023 with a bang, China’s economy had a bumpy recovery over the past year.
The Chinese economy’s precarious footing looks set to continue into 2024, as deep-seated structural issues and Chinese President Xi Jinping’s consolidation of political control threaten to dampen growth.
China’s reopening after the lifting of its harsh “zero-COVID” restrictions in January coincided with challenging economic conditions overseas, as soaring inflation made consumers less inclined to buy Chinese goods.
At home, Chinese consumers were wary to start spending again after nearly two years of lockdowns and border closures.
In July, China bucked the global trend and entered a period of deflation, which it struggled to exit in the second half of the year.
Prices in November fell 0.5 percent year on year – the sharpest drop in three years.
China’s real estate crisis continued to roll on as more developers teetered on the brink of default and home sales remained at half their December 2020 levels – spelling trouble for an economy in which property accounts for around 30 percent of gross domestic product (GDP) and nearly 70 percent of household wealth.
While the International Monetary Fund (IMF) expects the Chinese economy to finish the year at 5.4 percent growth, economists predict a slowdown in 2024 and beyond amid structural problems such as record levels of debt and a low birth rate.
Foreign investors have voted with their pocketbooks.
China posted a foreign investment deficit of $11.8bn in the three months to September – the first time foreign businesses pulled more money out of the country than they put in since records began.
Capital outflows in September hit $75bn, according to Goldman Sachs, the highest figure in seven years.
Although China has faced economic slowdowns before, the scale of challenges facing the economy has focused attention on Xi’s leadership.
Breaking with the collective-based decision-making of past leaders like predecessor President Hu Jintao, Xi has concentrated power in his hands, prioritised political control over the economy, and further blurred the lines between the Chinese state and the ruling Communist Party.
Part of that shift involved reducing the influence of the Chinese premier, officially the second-highest-ranking official in China’s political system, whose role has traditionally involved setting the tone of economic policy.
Under Xi’s leadership, economic policy has emphasised “stability” and the goal of “common prosperity” to close the gap between the haves and have-nots and the wealthy coast and inland provinces.
Such concentrated decision-making does not always bode well for the economy, Chenggang Xu, a senior research scholar at the Stanford Center on China’s Economy and Institutions.
“When the premier managed the economy, he would rely on experts in different areas, so it depended very much on the quality of the experts,” Xu told Al Jazeera.
“But since Xi Jinping’s rule, he [no longer] trusts the premier, and he took over the power to manage the economy directly. So who’s the expert? There’s no experts.”’
Carsten Holz, an expert on the Chinese economy at the Hong Kong University of Science and Technology, said the political climate has made it difficult to obtain a clear understanding of the country’s economic problems.
“The all too often near-anarchic environment of the past two decades has led to such features as an over-indebted property sector, a partially insolvent wealth management system, murky local government finances, commercial banks loan books of questionable quality, and an exploitative elite ranging from entrepreneurs to managers of ‘state-owned’ enterprises and government and Party cadres,” Holz told Al Jazeera.
“No authority can grasp the full extent of the individual economic problems, let alone their interdependencies.”
In the past few years, Xi has also overseen a far-reaching regulatory crackdown on industries ranging from tech to financial services and private education.
One major change in 2023 was the establishment of the National Financial Regulatory Administration, which is directly overseen by China’s cabinet, to take over the China Banking and Insurance Regulatory Commission’s role in regulating the financial industry.
Gary Ng, an economist at Natixis in Hong Kong, said such reforms have been necessary to fill in regulatory “grey areas”.
Other changes, however, have rattled investors, including an anti-espionage law that has raised questions about the legality of foreign businesses doing consulting and business intelligence work.
Earlier this year, China investigated the consulting firms Bain & Company and the Mintz Group – fining the latter $1.5m in August for “illegal business operations”.
“It’s a communist totalitarianism. It means that the Communist Party controls everything, including private firms, including foreign firms,” said Xu.
“The reason the foreign firms are going to be purged is exactly because they are afraid of these firms not being controlled by [the Party]. If you surrender completely under their control, then you can operate.”
Under Xi, Beijing has also tried to set the direction of its major industries, increasingly picking winners and losers instead of leaving it to the market, Ng said.
“Tencent and Alibaba were allowed to grow in the past because of the blessing of regulators, but right now, I think there is indeed a stronger state-led approach in terms of deciding what kind of industry does China want [and] where should the social or the general economic resources be deployed,” he said.
Beijing’s growing involvement in the economy is also a concern for investors in the context of geopolitical flashpoints such as Taiwan, which Xi has pledged to “reunify” with China by 2049.
Chris Beddor, deputy China research director at Gavekal Research, said that Russia’s invasion of Ukraine and subsequent sanctions on Moscow have been a wake-up call about geopolitical risks.
“It’s a live-fire demonstration to Western investors,” Beddor told Al Jazeera.
“What happens, basically, when the United States government does not like a country, and that means that you need to pull up quickly, and you will probably [find] there’s a lot of money in that process, and it’s quite painful.”
For Xi, finding new drivers of economic growth will be a major challenge.
An estimated 60 to 80 million apartments across China remain empty, and another 20 million are reportedly unfinished, according to Nomura, a Japanese investment bank.
According to a report from the Brookings Institution, China’s economy is so reliant on real estate that if the sector were to decline by one-third, 10 percent of Chinese production would have to be replaced by new activities.
While Beijing has avoided a major Western-style bailout for the sector, seemingly content to let some companies fail as a cautionary tale, there have been signs of a recent shift in policy amid reports that 50 developers were placed on a list for government support.
“An area where you can see [Xi’s] thumbprints on the economy is a focus on industrial policy, and the vision that economic policymakers laid that we don’t need property, maybe even we don’t need exports as much any more,” Beddor said.
“Those are the old drivers of growth. And instead, what we’re going to search for is new drivers of growth, especially in technology.”
Xi’s bid to reduce China’s reliance on property has had mixed results.
China’s electric vehicle and green energy industries have made strides, while other sectors such as semiconductors have struggled to make headway.
In a bid to offset the impact of US sanctions, Beijing poured $29bn into its semiconductor industry in 2019 – but the sudden influx of funding was marred by reports of widespread corruption and inefficiency.
A subsequent crackdown ensnared a raft of executives connected to China’s flagship semiconductor investment fund.
Huge levels of local government debt – amounting to $12.6 trillion, or 76 percent of economic output in 2022, according to the IMF – are another challenge facing policymakers in 2024.
In September, authorities allowed local governments to issue $137bn in bonds to pay off the debt, and weeks later, ordered banks to reissue loans to local governments due to mature in 2024 at lower interest rates.
Natixis’s Ng said China has many tools to deal with the local government debt issue, including a high savings rate and the power of the central government to “mobilise state resources” not readily accessible in other countries.
Others, including rating agency Moody’s, are less positive.
Earlier this month, Moody’s downgraded Beijing’s credit rating from stable to negative, citing its bailout of indebted local governments, the real estate crisis and the country’s shrinking population.
The rating agency reportedly told its employees in China to stay home ahead of the announcement due to fears of potential retaliation, according to the Financial Times.
One thing most economic analysts can agree on is that China’s economy is in need of significant reform to offset slowing down.
Holz, the economist, said that will be difficult under Xi’s tightened control of the economy.
“Going forward, economically we can expect to see more of what we have already seen in 2023: minor fiscal and monetary stimulus measures, many attempts at microeconomic problem solving through discretionary government interventions, and largely unsuccessful attempts to get on top of individual problems,” Holz said.
“Appeasing foreign fears of PRC nationalism and militarism to attract foreign direct investment and to increase exports is also currently again on the agenda,” he said, using an acronym for the People’s Republic of China. “But, fundamentally, the system is stuck. Reform and development cannot move forward for fear of major problems surfacing from unexpected corners of the economy.”