“It’s more difficult this year… Three factors cloud China’s economic outlook”

At the start of last year, the outlook for China’s economy appeared promising. The government had effectively dismantled its three-year-long zero-COVID policy at the end of 2022, fuelling hopes of a post-pandemic rebound. However, the reality proved otherwise. Over the past year, the Shanghai Composite Index declined by 3.7%, while Hong Kong’s Hang Seng Index fell by 13.8%. Consumer prices dropped for four consecutive months from October last year to January this year, sparking concerns over deflation. With the property sector in recession, fears are mounting that China could face a prolonged downturn similar to Japan’s experience in the past. 

Amid this bleak outlook, Robert Carnell, head of ING’s Asia-Pacific Research Centre and a specialist in the Chinese economy, stated in a virtual meeting with WEEKLY BIZ that “this year will be more difficult than last year.” He explained, “There was no economic rebound last year despite expectations following China’s reopening, and it now seems even harder to achieve organic growth in this second year of post-pandemic normalisation.” Carnell identified three key challenges: rising local government debt, a deteriorating labour market, and declining investor confidence. 

The most pressing issue, according to Carnell, is local government debt. During the pandemic, local authorities financed COVID testing and quarantine measures, leading to a surge in borrowing. According to data released by the International Monetary Fund (IMF) on 2 February, China’s local government debt stood at 39.582 trillion yuan (approximately 7,300 trillion won) at the end of last year—more than double the 2018 figure of 18.462 trillion yuan. Including liabilities from local government financing vehicles (LGFVs), total debt is expected to exceed 100 trillion yuan this year. “Local governments are in such poor financial shape that they’re unable to fund infrastructure projects to stimulate the economy,” Carnell said. 

The labour market is also under strain. The Chinese government abruptly stopped publishing youth unemployment figures in June last year, when the rate hit 21.3%. Last month, it reported a revised figure of 14.9% for December, following a change in methodology that excluded university students. “Employees in local government roles are even being warned that their salaries may be delayed for months,” Carnell noted. 

Investor sentiment presents another major challenge. “The fact that the Nasdaq index in the U.S. surged by over 40% last year, while China’s benchmark indices lagged, shows that investors lack confidence in the profitability of Chinese firms,” Carnell said. He added that Western companies already operating in China are diversifying their investments across Asia, with capital increasingly flowing to Vietnam and India. A series of regulatory moves by the Chinese government has also dampened foreign investment. “Sudden restrictions on the gaming industry are difficult to interpret,” Carnell said, adding that measures such as the anti-espionage law further discourage foreign companies from investing. 

Originally published in Chosun Ilbo: Opens in a new tabhttps://n.news.naver.com/mnews/article/023/0003816901?sid=101