Has China's economy run out of steam?

The city of Zunyi in southern China is filled with indications that the country's economy is experiencing a downturn.

Unfinished infrastructure endeavors can be observed in every direction; vacant residences, partially built tunnels, and grand undertakings that seem to have prematurely ceased due to depleted funds.

It represents a malfunctioning system.

The powerful Chinese economy, which once achieved astonishing growth of approximately 10% annually, is now experiencing a deceleration.

Fractures, caused by underlying structural vulnerabilities that were previously simple to cover up, have begun to surface.

The strategy of boosting the GDP through extensive borrowing and construction was effective in the past when China was a developing nation and required new infrastructures like roads, bridges, and airports. However, this approach is no longer viable in present-day China, which has accumulated overwhelming debt and exhausted its construction possibilities.

Many uncertainties loom regarding what comes next.

In Zunyi, a specific road stands as a clear example of the challenges currently affecting certain areas of the system.

Stretching across various areas of the urban landscape, the Funxin Expressway, a wide road with multiple lanes, was constructed with a staggering investment of 4 billion yuan. However, certain sections of this highway remain unfinished and deserted.

One edge of the street witnesses the infrequent passage of a few automobiles, while the opposite side stands desolate except for a handful of residents who now utilize it for leisurely walks or to accompany their canine companions.

There is an almost haunting feeling while strolling on it - a perception that the place has been somewhat neglected.

According to a resident named Mrs. Chen, the bridge has remained in its current state for a decade.

"She mentions that a large expanse of land was confiscated, resulting in the displacement of numerous individuals," she states.

"Why did the construction suddenly come to a halt?" she inquires, "This funding is provided by the government, and from what I gather, they haven't utilized the funds for any productive purpose. It seems like a complete squandering."

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After inquiring with the local authorities, the Zunyi branch of the Ministry of Foreign Affairs notified us that the construction of the expressway was finalized on the 31st of August 2023 (merely two days subsequent to our visit). They further informed us that it is planned to be operational in the early part of September.

The blog stated that the local authorities "actively promote and provide guidance to construction firms and developers to proceed with construction in a well-organized manner," and that the government "rigorously adheres to investment and management regulations set by the national and provincial levels."

Over yonder, past a diminutive mound, I stumble upon the linking passage, where the endeavor has ground to a sudden halt.

Across from the tunnel entryway stand colossal concrete columns indicating unfinished construction, while further ahead lie clusters of abandoned residences tagged for destruction - lives displaced to create room.

Only a handful of inhabitants have remained in this place, among them is Shi Chunli, a long-time resident of four decades.

She asserts that she handed over her belongings to the authorities in return for a fresh apartment in another location.

"They promised us a new apartment within a span of three years," she explains, "yet, come September, it will mark the beginning of the fifth year, and there has been no progress whatsoever."

And she has a rather distinct notion as to why her life is stuck in this state of uncertainty.

The primary issue revolves around the lack of funds. The government is currently facing a dire financial situation with no remaining funds at its disposal.

Similar initiatives can be found throughout China, but Guizhou province, home to Zunyi, stands out for its abundance of such undertakings.

Indeed, the province of Guizhou, which is among the most economically disadvantaged in the nation, holds the unfortunate distinction of being burdened with a debt amount that surpasses 135% of its Gross Domestic Product (GDP).

This countryside region heavily embraced the Chinese development approach that has consistently produced impressive results: extensive reliance on loans, enormous investments, and extensive construction, without considering the necessity of the projects.

Certainly, Guizhou possesses 11 airfields, several in close proximity to one another, and almost half of the globe's top 100 highest bridges, as reported by the state news source Economic Daily.

This is a widely adopted model across the nation. In recent years, investments have constituted an average of 44% of China's economy, a phenomenon that experts claim has no parallel in the past.

However, although this strategy was logical during China's period of catching up with other countries, it has now become a significant drawback.

The government has limited options to rely on in order to achieve the substantial economic growth it has grown accustomed to.

However, this poses a dilemma that the government is unable to solve solely through monetary investment, as it has done in response to previous economic difficulties.

Many specialists will emphasize that this excessive amount of unproductive investment has been a noticeable characteristic of the Chinese economy for numerous years. So, why is it having a negative impact at this moment?

This is mainly due to the fact that other sectors of the economy are facing difficulties, which reveals the underlying weaknesses.

Prices in China decreased last month compared to the corresponding period of the previous year, causing concerns about potential extended deflation.

The main problem lies in the fact that post-pandemic, consumer demand in China has not recovered as expected by its leaders.

For months, the strict measures implemented to combat the spread of COVID-19 resulted in entire cities being abruptly subjected to severe lockdowns, leading to the devastating loss of numerous businesses and a significant depletion of families' financial reserves.

As a result, individuals simply lack the funds to freely spend, and whatever little they possess, they are hesitant to let go of (China's saving rate ranks among the highest globally, as per IMF data).

These patterns were evident in a few of the lesser-known markets in Zunyi.

One vendor conveyed to us that the state of their business is currently unfavorable, noting a continuous decline in performance as each year passes by.

"The global crisis," she states, "the ramifications resulting from this unprecedented upheaval are of immense magnitude."

There are additional concerns as well, excessively controlling governmental measures that took strict action against specific sectors such as technology and private tutoring, have greatly harmed those industries and caused unease among foreign investors.

In this current situation, countless youths are facing difficulties in securing employment. The percentage of unemployed individuals aged 16 was at an all-time high of 21.3% in June.

The government has ceased the publication of these statistics, however, specialists are concerned that the actual figure could be significantly greater.

But perhaps the most daunting concern we face is the severe turmoil in the real estate market.

Just like how local government invests in building infrastructure, Chinese real estate developers have been borrowing massive amounts of money for years to construct millions of apartment units. They frequently sell these properties to buyers even before the construction is finished.

After the central government took action in 2021 to control this excessive borrowing, numerous individuals faced the challenge of being unable to meet their debt obligations. Companies like Evergrande, which was formerly one of China's largest developers, failed to repay their debts.

It threw the market into turmoil that it has battled to bounce back from, causing numerous purchasers to be stuck with incomplete residences and discouraging many individuals from putting their money into real estate.

Prices have experienced a decline, resulting in significant repercussions for sectors catering to the construction industry.

This month, all the attention has been on Country Garden, another Chinese developer, once known for being reliable, as it also faced difficulties in fulfilling a prearranged bond payment.

The company's stocks have experienced a surge, nonetheless, after news emerged that it has reached an agreement with its lenders to settle the payments through gradual installments spanning a period of three years.

There are concerns regarding the outcome of this situation and its potential impact on the global community.

In light of growing international attention towards China's economy, President Xi Jinping has astounded analysts by indicating his absence at the upcoming G20 summit in India. Premier Li Qiang will represent China instead.

However, analysts argue that it is highly unlikely there will be a significant economic downturn.

"It's highly improbable as the fiscal disintegration essentially stems from a disruption in the balance sheet," elucidates Michael Pettis, a distinguished authority on the Chinese economy and lecturer at Peking University.

In China, the authorities hold tremendous authority and can rearrange debts according to their discretion, ensuring that no balance sheet failures occur.

In the grand scheme of things, this is an unfavourable situation as it indicates a significant delay in making required changes compared to what could have been achieved. However, when viewed through the lenses of society and politics, this turns out to be advantageous, especially in the immediate future.

According to him and other specialists, it is highly probable that China will experience a longer phase of economic stagnation and readjustment similar to the situation Japan faced starting from the 1990s.

However, it is highly probable that there will be some discomfort in store for the average citizens of China during this gradual but ultimately essential course of action.