China presents a compelling case of the growth paradox, where robust economic indicators mask underlying disparities and societal sentiments. The dichotomy between China’s impressive economic figures and the lived realities of its businesses and people indicates how these contradictions coexist. Understanding these divides and seeking solutions to bridge them can have a significant impact on the nation’s economic trajectory and its global standing.
A Growth Paradox
On January 17, the National Bureau of Statistics announced that China’s GDP growth for 2023 reached 5.2 percent, a growth rate that is highly commendable and ranks prominently on the global stage. That figure would suggest that the Chinese economy has achieved stable and rapid growth, again. However, the reality shows clear signs of strain: Consumers are saving their shrinking disposable incomes instead of spending them, and enterprises are suspending their investments due to fear of declining profitability and company value. In 2023, the total market value of A-shares in China decreased by approximately 8.5 trillion yuan, an amount equivalent to the total cost of the Belt and Road Initiative over its lifetime (estimated to be between $1.2-1.3 trillion, or about 8-9 trillion yuan). This decline occurred against the backdrop of growing capital markets in the United States, various European countries, and India. In the first trading week of 2024 alone, an additional 7 trillion yuan was lost. Stock markets mirror the collective sentiments of investors, currently indicating a loss of confidence in China’s growth prospects. People I talked to during my recent trip to China shared these sentiments: The rich have little confidence in growing or even sustaining their wealth; the poor have little hope of upward mobility. Two phrases, “involution” (内卷) and “lying flat” (躺平) encapsulate what happened over the past year. Involution is a sociological term describing a state of excessive and ineffective competition, leading to a zero-sum game where resources are redistributed but minimal genuine value is created. Lying flat, an internet slang term, characterizes the attitude of those who opt out of this relentless competition, choosing instead to accept their circumstances and leave their fate to time. In socioeconomic terms, the “growth paradox” describes a phenomenon where there is an inconsistency between the statistical data of economic growth and the actual economic welfare of the general populace. This disparity involves complex structural issues that require comprehensive policy adjustments and socioeconomic development strategies for resolution.
Unequal Benefits of Economic Growth
The growth paradox is primarily due to the unequal distribution of economic growth benefits. Large enterprises and the urban elite disproportionately accumulate wealth, benefiting from the country’s economic growth. Their success overshadows the slower growth and constrained opportunities for private businesses, particularly small- and medium-sized enterprises (SMEs), and rural residents. Despite SMEs in China representing 99.8 percent of all business entities and employing nearly 80 percent of the workforce, they face a contraction phase marked by limited access to capital, complex regulatory hurdles and excessive competition in a shrinking market. The Purchasing Managers’ Index (PMI) data from October 2023 underscored this divide: Large enterprises posted a PMI of 50.3 percent, with state-owned enterprises at 50.0 percent and large private enterprises at 50.7 percent, all indicating expansion. In contrast, medium-sized enterprises experienced a PMI of 48.6 percent, and small enterprises were at 47.5 percent, both in the contraction zone. This pattern reflects broader industrial output differences in China. State-controlled enterprises saw a 7 percent growth in 2023, compared to a modest 5 percent for private enterprises, most of which are SMEs. Given the large number of employees in the SME sector, more people felt the strain of an economic downturn.
Overcapacity vs Lack of Capacity
As the world’s factory, China’s production capacity was tailored to supply the global market during the golden age of globalization, from 1999 to 2018. However, since the onset of the trade war between the United States and China, efforts to de-risk dependency on China’s supply chains have particularly impacted China’s manufacturing sector. SMEs, the backbone of China’s export-oriented manufacturing sector, are encountering severe profitability challenges, with many on the brink of bankruptcy. A sharp reduction in sales for an export-oriented company can significantly affect not only its own profitability, valuation, and stock price but also the financial health of many SMEs on the entire supply chain. This situation has created a vicious cycle where reduced profits hinder investment in R&D, production growth, and job creation, while intensified price competition from an involution-style rivalry further diminishes profits and, in some instances, leads to business shutdowns. This self-reinforcing cycle underscores the difficulties of operating in an economy facing declining demand, which results in serious overcapacity and unemployment.
On the other hand, China’s rapid advances in manufacturing have led to a dilemma in geopolitics. The country has ascended the global value chain, modernizing its industrial sector. This rise has been accompanied by an assertive recalibration of its international standing, aiming to reflect its burgeoning economic clout, especially in negotiations with the United States. However, this upward trajectory is tempered by a vulnerability due to its dependence on imported technologies and access to an open global market for its production capacity. This leaves China susceptible to U.S. sanctions on advanced technologies and to shifts in supply chains away from China toward the nearshoring and friend-shoring partners of the United States. The semiconductor sector illustrates this point vividly. China faces significant “chokepoints” imposed by the U.S. and its allies in chipmaking, leading to shortages in high-end, especially AI, chips. Concurrently, China’s substantial investments in mature-node chipmaking risk creating internal competition and overcapacity, which could potentially result in anti-dumping trade restrictions from other countries.
Domestic vs Geopolitical Challenges
The disconnect between economic growth, as suggested by statistical data, and the collective sentiments arise from a misalignment between macroeconomic trends and microeconomic activities within China. Government policies might focus more on long-term structural and quality improvements of the economy rather than on short-term employment and income growth, which may not be immediately understood or accepted by the public. Policy-driven GDP growth in large projects or investments in certain areas or industries may not directly translate into job opportunities or income increases for average citizens.
On one hand, sectors like renewable energy, electric vehicles, and high-tech manufacturing – considered the three new engines for China’s GDP – continue to offer promising growth avenues. On the other hand, businesses face significant challenges due to unpredictable policies, contracting export markets, reduced government spending, and cautious consumption by local consumers. These challenges cascade down the economic value chain.
The collapse of several high-profile real estate companies last year has triggered a domino effect across supply chains, resulting in decreased production within upstream industries such as steelmaking, cement, and construction, as well as affecting downstream sectors like furnishing and furniture. A fear of widespread economic instability and loss of investor confidence may ensue. At the societal level, collective sentiments include lowered expectations for future earnings; rising unemployment, especially among the youth; growing income inequality due to the concentration of wealth in certain industries and regions; and increasing costs (visible and invisible) in education, healthcare and aged care.
Globally, China is facing an increasingly hostile geopolitical landscape, where, as shown in the semiconductor sector, geopolitical pressures result in critical technology shortages and push China toward developing a self-reliant ecosystem to mitigate foreign influence and secure its economic future.
The China-U.S. relationship is at the core of China’s geopolitical complexity. Over nearly half a century, the relationship between China and the United States has evolved from diplomatic engagement to deep economic cooperation, and now to a state of strategic competition. Since the establishment of diplomatic relations, trade between the two countries has grown more than 200-fold over 45 years, with bilateral investment exceeding $260 billion, and over 70,000 American companies investing and operating in China.
Recently, the economic relationship between the two countries has shifted into a new era of technology rivalry, marked by strategic competition for control over global supply chains of critical technologies and minerals. This rivalry can potentially lead to technology decoupling. Such developments have profoundly impacted China’s economy, with export-oriented SMEs being particularly affected due to U.S.-led reshuffling of the global supply chains.
A More Reclusive China?
Facing such challenges, China is pivoting toward an inward-looking strategy. It is cultivating a self-reliant ecosystem focused on bolstering its large domestic market and internal circulation, aimed at becoming less susceptible to….