A Crisis of Confidence Is Gripping China’s Economy

China's previously invincible economy is currently burdened by a plethora of issues, and a mounting absence of confidence in what lies ahead is approaching a state of hopelessness.

August 25th, 2023Refreshed at 1:55 p.m. Eastern Time

At the beginning of this year, David Yang was filled with hope for the future of his fragrance manufacturing plant in the eastern part of China.

Following almost three years of crippling Covid lockdowns, China decided to lift its limitations towards the end of 2022. The economic outlook appeared promising, with rapid recovery anticipated. To seize this opportunity, Mr. Yang and his two associates made a bold move in March by investing over $60,000 to enhance the factory's production capabilities, foreseeing a surge in growth.

However, the anticipated establishment of the new enterprise never came to fruition. To make matters worse, individuals are refraining from making purchases, as confirmed by his statement, and the number of orders has significantly decreased by two-thirds compared to the figures from five years ago.

"It's quite dispiriting," Mr. Yang expressed. "The economy is currently facing a significant decline."

Throughout the majority of the previous 40 years, the Chinese economy appeared to be an indomitable power, propelling the nation to its status as a global superpower. However, the economy is currently burdened by a succession of predicaments. An excessive borrowing and overbuilding spree has given birth to a real estate crisis, coinciding with a broader debt crisis. Meanwhile, the youth is grappling with unprecedented levels of unemployment. Amidst the continual flow of unfavorable economic updates, a fresh predicament is arising: a crisis of trust.

There is an increasing absence of trust in the prospective state of the Chinese economy, which is now bordering on a feeling of hopelessness. Individuals are refraining from excessive expenditure, companies are hesitant to make investments or generate employment opportunities, and aspiring entrepreneurs are not initiating fresh enterprises.

Larry Hu, the chief economist for Macquarie Group, a financial services company from Australia, stated that a significant problem currently affecting the Chinese economy is a lack of confidence.

According to Mr. Hu, the decline in trust is causing a negative chain reaction. Chinese individuals are refraining from spending due to concerns about job opportunities, while businesses are reducing expenses and holding off on recruiting because consumers are not spending.

Over the last couple of weeks, there has been a significant outflow of funds amounting to over $10 billion from China's stock markets. On Thursday, the securities regulator of China took action by calling for a meeting with the leaders of national pension funds, major banks, and insurers to exert influence on them to increase their investments in Chinese stocks. Furthermore, Hong Kong's stocks recently experienced a steep decline, plunging over 20 percent from their peak in January and entering a bear market phase.

China has taken inspiration from its ability to overcome previous hardships and has developed a strong confidence in both its economy and its state-directed approach. It demonstrated impressive resilience during the global financial crisis in 2009, swiftly recovering from its impacts. Moreover, it managed to endure and prove its significance during the trade conflicts with the Trump administration. When the COVID-19 pandemic wreaked havoc on economies worldwide, China's economy exhibited remarkable resiliency and made a robust comeback. In 2022, the Chinese Communist Party's mouthpiece, the Global Times, boldly proclaimed China as an "unstoppable miracle."

One reason behind the current lack of confidence is the possibility that Chinese policymakers have limited alternatives to combat the economic decline compared to previous occasions.

In the year 2018, as the economy engaged in a commercial conflict with the United States and its stock market experienced a sharp decline, Xi Jinping, the leader of China, delivered an inspiring address.

Mr. Xi appeared before an international trade exhibit in Shanghai and aimed to alleviate concerns: There should be no hesitation in maintaining faith in the Chinese economy, even in the face of occasional fluctuations, he stated.

According to Mr. Xi, the Chinese economy is comparable to an immense ocean rather than a mere pond. He acknowledges that while the ocean may at times appear tranquil, it is inevitable for strong winds and storms to occur. These disruptive elements are essential for the ocean to truly be what it is. In contrast, a pond can be easily disturbed by such turbulent conditions whereas an ocean remains unaffected. Therefore, when discussing the future prospects of the Chinese economy, he emphasizes that confidence is well-founded.

However, in the past few months, Mr. Xi has remained relatively silent regarding the economy.

China is currently facing a significant challenge, distinct from previous global crises, as a culmination of unresolved internal issues emerges. Several of these problems have arisen due to alterations in policies implemented by the government under Mr. Xi's leadership.

Following the global economic downturn in 2008, China implemented a substantial economic stimulus plan aiming to revive its economy. In 2015, as the real estate market faced instability, the Chinese government distributed monetary benefits to individuals, allowing them to exchange deteriorating shacks for brand-new apartments. This initiative was part of an urban redevelopment strategy, which consequently triggered a construction upsurge in smaller cities across China.

Presently, decision-makers are facing a completely new situation, which compels them to reconsider their usual strategies. Regional administrations and enterprises are burdened with increased liabilities and have less flexibility in terms of borrowing and expenditure. Moreover, due to years of consistent investment in infrastructure, the necessity for additional airports or bridges is not as prominent anymore, as these large-scale projects no longer possess the capability to stimulate economic growth.

China's policymakers are facing limited options as they are responsible for implementing several actions that have led to the current economic challenges. The stringent "zero Covid" lockdowns have resulted in a complete halt of economic activities. Additionally, the real estate sector is experiencing the repercussions of the government's initiatives from three years ago, aimed at controlling excessive borrowing by developers. Furthermore, the increasing restrictions on the rapidly expanding technology industry have compelled numerous tech companies to reassess their goals and downsize their workforce.

When the key figures in China's government met in July to discuss the worsening economy, they didn't roll out an extravagant spending plan as many had expected. Instead, the Political Bureau of the Chinese Communist Party issued a lengthy list of statements during the meeting, much of which seemed repetitive. Though they emphasized the importance of "building trust," they failed to provide specific measures indicating their determination to achieve that goal.

"Believing in the Chinese economy essentially means believing in the Chinese government," remarked Kim Yuan, an individual who was laid off from the home decor sector in the previous year. Despite facing difficulties in securing new employment, he expressed that as long as the government retained its authority, he didn't anticipate a substantial decline in the economy.

China's index measuring the confidence of consumers

Faced with diminishing trust, the authorities have resorted to their usual approach and abstained from disclosing worrisome financial information.

This month, China's National Bureau of Statistics made an announcement that it will no longer publish data on the unemployment rate among young people. This indicator, which has been closely monitored as a reflection of the country's economic difficulties, had shown a consistent increase in joblessness among individuals aged 16 to 24 for six consecutive months. The agency stated that there is a need to enhance and streamline the process of gathering these statistics.

This year, the agency also put an end to publishing reports on consumer sentiment, which are considered reliable indicators of people's readiness to make purchases. Confidence showed a small improvement at the beginning of the year, but sharply declined during the spring season. The official government office responsible for statistics released the last survey findings for April, terminating a collection of data that had been ongoing for 33 years.

Rather than easing people's concerns, the abrupt elimination of closely monitored information on Chinese social media has triggered curiosity among some users regarding what important updates they could be overlooking.

Laurence Pan, a 27-year-old individual, became aware of a growing issue in 2018. He observed a reduction in budgets amongst customers at the global advertising firm he was employed at in Beijing. In the following years, he transitioned between various agencies, but the clients' reluctance to invest persisted.

He left his previous job three months ago. Mr. Pan mentioned that in previous instances, he was able to secure new employment swiftly, but this time he is facing difficulties in finding a job. Since last month, he has submitted applications for nearly 30 positions, yet he hasn't received any job offers. Due to this situation, he is contemplating working part-time at a convenience store or a fast-food establishment to cover his expenses. To cope with the unpredictable circumstances, he has reduced his spending.

"Currently, everyone is facing immense challenges and experiencing financial constraints," he expressed. "This could potentially be the most challenging period I have ever encountered."