A soldier walks past a woman on the escalator at a retail district in Beijing, Wednesday, Nov. 15, 2023. (AP Photo/Ng Han Guan) In June, retail sales of cars in China fell 23 percent from a year earlier. For the first half of the year, sales were down 20 percent. The China Passenger Car Association now forecasts sales for the full year will be off by 14 percent.
The bellwether car sector is not the only area to be hit by the dropoff in consumption in the world’s second-most populous country. Smartphone sales, another important indicator, fell 13 percent year-on-year during the May 26-June 21 shopping festival.
China’s consumers are sitting on their hands. You can’t blame them. The economy, at least as most experience it, is bad and getting worse.
The official numbers tell a different story. Gross domestic product, reported by the National Bureau of Statistics, grew 4.4 percent in the first quarter of this year. That number was almost certainly overstated.
Yes, China’s exports are booming. The country has “islands of excellence,” tech companies and highly automated manufacturing businesses. But as British economist George Magnus notes, they “are no substitute for good macroeconomic governance and well-institutionalized technology ecosystems that diffuse benefits throughout the economy.”
Despite the success of these sectors, the economy is in distress. A report from New York-based GlobalSource Partners last December suggested the overall unemployment rate in the country then was at least 20 percent. Beijing’s official urban unemployment rate for June was 5 percent, but that’s a fantasy number.
The situation is so bad inside the country that the central government, for the first time since the 1990s, is not setting a numeric target for urban job creation in a five-year plan.
The other problem is underemployment. As China’s manufacturing sector becomes highly automated — the country has “dark factories” where lights are off because there are no humans on the assembly line — people are forced into the gig economy.
Gig jobs now number about 320 million, about 44 percent of the workforce. “Those who used to take taxis now have to drive them themselves,” a 30-year-old told Reuters.
And as the gig economy becomes saturated, the unemployed are leaving cities for the countryside. College graduates are now vying for jobs as shepherds. Young city dwellers are “retiring” to farms.
Xi Jinping has built an economy focused on building industrial capacity and depressing consumer demand. For instance, he has kept deposit interest rates at banks artificially low to support state lending for uneconomic infrastructure projects and to encourage manufacturing. Low rates mean less money in the hands of consumers.
As a result, consumption contributes about 39 percent of China’s gross domestic product, a rate among the lowest in the world. And that rate, from all indications, is declining.
Will things change? “The chance of structural reform in Xi Jinping’s China,” as Anne Stevenson-Yang of J Capital Research USA told me, “is none.”
Xi does not believe in empowering citizens, a necessary consequence of moving to a consumption-based economy. As Zongyuan Zoe Liu notes in Foreign Affairs, the Communist Party leadership believes “consumption is an individualistic distraction that threatens to divert resources away from China’s core economic strength: its industrial base.”
Andrew Collier, a Harvard Kennedy School scholar, told me this month that Xi “wants to rebalance the economy toward consumption while continuing to pour capital into AI, semiconductors, and electric vehicles, but those goals are in conflict. The collapse of the country’s prime growth engine — property — has boxed Xi into a corner. He will have to choose between sustaining his industrial ambitions and fixing underlying weaknesses in the economy through big structural changes.”
“There’s a property-crisis sized hole in the Chinese economy,” Collier points out. What could be the greatest destruction of wealth in modern history is now taking place in China, in the property market.
Collier said a friend who recently met with senior Chinese officials told him they said, “there was no end in sight for the bottom of the property market outside of Tier 1. He said that assessment is “definitely more pessimistic than in previous years and more so than among some Western economists.”
The precipitous decline in property outside the four Tier 1 cities — Beijing, Shanghai, Guangzhou and Shenzhen — has created a negative wealth effect, depressing consumption. Considering that some 70 percent of the household wealth of the Chinese people is represented by property, that effect is substantial.
Chinese analysts constantly talk about the country raising consumption’s share of the economy, but that is not possible as long as Xi is in charge.
No society can maintain such an unbalanced economy for long. China, behind strong currency walls, can manage longer than free societies in defying the laws of economics, but eventually all economies rebalance. The issues now are how severe that adjustment will be and how long it will take.
Gordon G. Chang is the author of “Plan Red: China’s Project to Destroy America” and “The Coming Collapse of China.”
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