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China has been in the news a lot recently, and not for good reasons! The headlines show a declining economy, with more negative forecasts being made for its future. I hope to provide more of a simple breakdown of the problems facing China, and the steps that have and could be taken to improve the situation.

Problems facing China:

• Unemployment – China has high youth unemployment and an aging population – the central government has launched regulatory crackdowns on sectors dominated by privately owned companies that previously employed millions of young people. Internet giants have also been hit with huge fines for monopolistic behaviour.

• Property market – Chinas real estate industry is in crisis, Property and industries linked have been a large part of the Chinese economy in recent years, and provided a significant portion of its GDP. But the sector is now in deep trouble. For the last two decades or so, the property sector boomed during privatisation. However, the pandemic and an aging population made aggressive housebuilding an uncomfortable mix. The government feared a 2008 style housing crisis, and in response, limited how much developers could borrow. As a result, developers owed billions they could not pay back. As we’ve seen in the data, demand for houses has slumped and property prices have plunged. Consequently, Chinese homeowners are, and feel poorer, creating a negative wealth effect. “In China, property is effectively your savings,” (Alicia Garcia-Herrero, chief Asia economist at wealth management firm Natixis), as a result, unlike in Western countries, there has been no post-pandemic spending boom. This has therefore worsened the debt problems faced by the country’s local government as “It is estimated that more than a third of their multi-billion-dollar revenues come from selling land to developers” (Nick Marsh, BBC)

• Deflation – As many other major economies grapple with inflation, consumer prices in China fell by 0.3 percent year-on-year in July to enter deflation – As deflation sets in more people prioritise saving over spending and investment, as they believe they can get a better deal on purchases as prices fall, and the value of investments may fall also.

• Economic Model – China’s growth in the past 3 decades has been pushed by primarily by building: from infrastructure such as roads, bridges, and train lines, to factories, airports, and houses. However, there are limits to how much infrastructure can be built and China must find a way to provide economic prosperity to its population other than building. This, however, would take prodigious reform. For example, if China wanted to look at the financial sector to boost its economy, the government would first need to significantly lower regulation, ceding large amounts of power to private interests which historically, China is not in favour of. This can be seen in the present day, where the opposite has happened. The Chinese government has “tightened its grip on the finance sector”, criticised “westernised” bankers for their hedonism and cracked down on big technology firms like Alibaba (Nick Marsh, BBC). Which, as mentioned previously, has had a huge negative impact on the youth, who struggle to find white-collar jobs

Chinas’ response:

The Chinese government is taking an active approach and I believe there will be a more positive outlook as we enter Q4.  Authorities announced new policies in July with the goal of stimulating the purchase of home appliances and electric vehicles. This was proceeded by tax benefits for households and businesses in order to boost consumption. To further boost activity, China’s central bank has recently cut two reference rates, with the aim of incentivising commercial banks to grant more credit. Now, in China, first-time buyers have lower interest rates and down payments ratios. As a result, more first-time buyers are entering the market. “Over 1,800 new apartments changed hands in Beijing in the first weekend since the new measures were released, amounting to more than half of last month’s sales”- (Yicai research). In Shanghai, around “30% more people viewed apartments last weekend than a week ago and there was a jump in the number of properties sold”, (Yang Yulei, chief analyst at Shanghai Lianjia Research Institute). It was also found that most of the new customers are people who have been waiting for curbs to ease in order to purchase, showing that China’s approach is having a positive effect on consumers putting off spending as they expect prices to fall.

The most important step I believe China can take to improve its current situation is to boost its real estate sector and get its young people into employment. As mentioned briefly above, China is seeing a positive reaction to its policy in the property sector. However, the data on youth unemployment is yet to be seen.

How can China improve its youth unemployment? Firstly, the data is limited and there is more mixed story than meets the eye. China’s economy has so far been driven mainly by three sectors: “export-driven manufacturing, construction and large energy and capital-intensive heavy industries dominated by the state, none of which offer large number of white-collar jobs suitable for university graduates” (CitiBank).

By contrast, “low-skilled workers with a primary and junior secondary education, especially young migrants from the rural China, can easily find jobs in the transportation, construction, and catering industries”.

Therefore, it stands to reason that the way China can tackle youth unemployment is:

• Incentivising students to match qualifications and skills in industries where there is demand for labour.
• Subsiding industries which employ more young people
• Creating a pathway for students to enter jobs that don’t necessarily immediately fit their skill set.
• Relaxing regulation on the private sector and decentralising the economy to allow for the absorption of a large increase in labour force.