China’s Economy: Will It Be Okay?

Currently, China is facing a huge recession; according to Iris Pang of ING, “the last contraction this big was 5.8% in 1967 during the upheavals of the Cultural Revolution.” Clearly, China is facing a huge problem, and there were signs of a bounce-back, however China’s activity in terms of recovery has slowed tremendously—

Why is that?

One major factor is that the Chinese economy has already been beaten down by the recent trade war with President Trump over Beijing’s technology ambitions and trade surplus. Just last year, China’s growth was at a 30-year decade low of 6.1% — not even the 2008 recession was this bad. China’s economy hasn’t had the chance to recover from this, so they are being put to the test again in 2020.

Another issue is the global trade barriers that are being put up to stop the spread of COVID-19. These walls being put up are definitely helping everyone’s health, but the well-being of China’s economy is at risk. The lack of worldwide demand is holding businesses back; as said by Louis Kuijs of Oxford Economics,

“Lingering consumption weakness and sliding foreign demand will weigh on the upturn.”

China’s boom in the 1980’s — which holds its historical high of 15.2% — was mainly due to the newly implemented market liberalization in which Chinese sellers had the newfound freedom of selling to foreign markets. This is also the main factor that has kept China going for so long; clearly seen as China has had mainly surpluses in their current account. This foreign market that they no longer have easy access to is currently holding them back, stopping them from bouncing back as they want.

How is China going to be fixing this?

Well, as we’ve seen from previous endeavors, there are likely three major ways in which China will act:

Investment in “new infrastructure”: by vigorously investing 4 trillion yuan in 2008, China was able to kickstart its economy, effectively minimizing the impacts of the global recession. This time, the investment will likely be about 34 trillion yuan, with investments in software and technology such as 5G.

Restraints on land transactions and internal movement will be lightened by the government. This will allow rural residents to move freely into various cities, encouraging urbanization in China. This urbanization is said to help the economy grow, and will help in the economy’s recovery from the current recession.

Vouchers will be given to individual households by the government. Vouchers are given out in order to maintain the market demand’s current level, as well as generate consumption in the economy. These are preferred over the cheques of money seen in more capitalist countries due to the notion that households will save money in a recession.

These are some pretty big moves; will they work?

Well, to an extent.

Though they will probably have a positive impact on the economy, there are also many drawbacks to them; as seen in 2008. Massive levels of inflation with tremendous housing prices are likely to happen, as well as some distortions in the financial market. Since it was so difficult to finetune the impacts of the government’s actions — especially when acting in a crisis — China’s debt grew to become one of the world’s largest in an extremely short period following the 2008 catastrophe.

So, though China's methods are most definitely not wrong, their choices may be a bit risky. Investing in technologies similar to 5G might lead to returns only in the long run, but won’t necessarily help China at the moment.

China’s approach may have worked out in the 2008 recession, but this time it seems that China’s economy may need a different approach than before.