Car production in China set records last year. Restaurants and hotels were always full. The construction of new factories increased.
But China's economic strengths hide weaknesses. Deep discounts helped boost car sales, particularly electric cars. Guests and travelers opted for cheaper meals and cheaper hotels. Many factories have been operating at half capacity or less due to weak demand in China and are working to export more to compensate.
China's economy grew 5.2 percent last year as it recovered from nearly three years of strict “zero Covid” pandemic control measures, the country's National Bureau of Statistics announced on Wednesday. In the last three months of the year, production rose 4.1 percent annually.
In the longer term, China's growth will slow. High debt, a housing crisis undermining confidence and a shrinking and aging workforce are weighing on production.
Western economists forecast growth this year will be 4.5 percent or less, the result not of a cyclical downturn but of a painful decline that will last for many years, what economists call secular stagnation. Prices are beginning to fall at a rate not seen in China since the shock of the global financial crisis in 2009, a phenomenon known as deflation that can push heavily indebted families and companies into bankruptcy.
“Secular stagnation — essentially a chronic excess of savings that leads to slow growth, deflation, asset bubbles and financial stress — has shifted from the Western Hemisphere to China,” Lawrence H. Summers, a former Treasury secretary, said in a recent statement Interview week in Shanghai.
High debts and the associated high interest payments limit China's room for maneuver. Since the financial crisis, central and local governments have responded to economic weakness by spending more on new roads and other infrastructure and by extending more loans to manufacturers in favored industries. This has stimulated growth, but has also led to ever-increasing debt, particularly at the local level.
Last month, ratings agency Moody's issued a negative outlook for the Chinese government's financial health. Another agency, DBRS Morningstar in Chicago, downgraded its rating on China's sovereign debt in November.
Rohini Malkani, senior vice president of sovereign debt ratings at DBRS Morningstar, expressed concern that the Chinese economy's total debt now exceeds three years of economic output – a higher level than in developed countries such as the United States.
“It has more than doubled in the last 15 years,” even compared to the country’s rapidly growing production, she said.
Zhang Jun, dean of the School of Economics at Fudan University in Shanghai, said in comments distributed in Beijing's “East Is Read” newsletter that the Chinese government was less willing to support the economy by borrowing and spending Boost infrastructure. As a result, he wrote, “I increasingly feel that the slowdown in growth has a certain inevitability.”
Economic output last year was roughly in line with the consensus of 5.3 percent in a survey of economists last week by Caixin, a Chinese news organization. The economy also met the government's target of around 5 percent growth set in March last year. Prime Minister Li Qiang said on Tuesday at the World Economic Forum in Davos, Switzerland, that the increase last year was “around 5.2 percent.”
Last year's performance represented a significant rebound from 2022, when the economy grew just 3 percent. A two-month Covid lockdown in Shanghai in spring 2022 disrupted production across much of central China and led to a sharp nationwide decline in consumer confidence, which remains low. An abrupt lifting of Covid controls in early December 2022 then triggered a nationwide wave of illness and death, which severely depressed economic output in the final weeks of the year.
Many economists had predicted that there would be a significant recovery in 2023 given such a weak base. But after a good start, spending declined. Property prices fell, causing households to feel less financially secure. And Beijing has weakened the country's social safety net. Among other things, policymakers a year ago ended a comprehensive unemployment insurance program that was launched during the pandemic to put pressure on people to find jobs.
With the exception of the wealthiest households, all households monitored their spending closely. Many restaurateurs complained about steep drops in average nights spent, while hotel managers were upset that travelers were choosing cheaper rooms.
About 6,000 restaurants have closed in Shanghai during the pandemic, but another 7,500 opened last year, said Chris St. Cavish, a food critic and industry analyst in the city, China's most populous. The industry's growth has occurred almost exclusively in budget cafes, which charge less than $14 per person, and luxury restaurants, which charge up to $1,000 per person.
“The middle is a tough place to be a restaurant right now,” Mr. St. Cavish said.
The biggest concern about China's economy in the coming year is the same as in the past two years: What will happen if the country's real estate market collapses? Existing properties are already being sold for around a fifth less than at the peak in summer 2021, and then buyers can be found at all. The pace of transactions has slowed.
The worst impact of the real estate problems was felt in developers' difficulties raising money and starting new projects. Investors fear construction volumes could decline sharply as developers complete work on previously promised apartments in the coming months.
Tao Wang, chief China economist at Swiss bank UBS, said the long decline in construction activity was not yet over, although a decline in activity was unlikely. She added that “there is a risk that house prices will fall more sharply and household confidence will be more affected.”
China's state-controlled banking system has rapidly shifted its priorities over the past year. Few loans are given to real estate developers and home buyers. Instead, loans to industrial companies for factory construction have skyrocketed.
Much of the increased factory production is sold abroad. China's trade surplus in industrial goods corresponds to around 10 percent of the country's economic output. Exports fell last year in dollar terms as the Chinese currency weakened significantly, although they have risen since November and could rise further. Multinational retailers are ending sales of excess inventory they had accumulated at the end of the pandemic and have begun placing new orders.
“China’s exports are likely to explode,” said Hayden Briscoe, a senior asset management strategist at UBS.
Car factories are being built rapidly all over China. Vehicle exports rose 58 percent last year and China overtook Japan to become the world's largest car exporter.
The question now is how to convince Chinese households to stop parking a large part of their income in bank accounts and start spending money again. “Dealing with a chronic savings surplus could be the key macroeconomic challenge for China over the next decade,” Summers said.
Li You contributed to the research.