These are un-Chinese low figures, which the Chinese government announced on Monday: economic growth of 4 percent in the fourth quarter of 2021. It is the lowest growth figure since 1990, except for the first months of 2020, when Covid-19 had just arrived. broke out. The Chinese economy then recovered quickly, but now appears to be in a downward trend.
The Chinese economy is suffering from the strict zero-covid policy and from unrest in the real estate sector. But China is also increasingly reaching the limits of its economic model, and is in danger of entering a long period of slow growth. An overview of the latest figures, their credibility and what they teach us about the state of the Chinese economy.
Economic growth: 4 percent (Q4 2021)
2021 started great for the Chinese economy, with a spectacular recovery after the covid dip, with growth of 18.3 percent in the first quarter. But in the middle of the year, the recovery started to falter. On an annual basis, China still delivers good figures (8.1 percent growth), but that hides a dramatic fourth quarter. The Chinese government also avoids big jumps in its growth figures, so that 4 percent may be slightly better than reality.
Chinese growth is partly held back by the zero-covid policy, which regularly leads to interruptions for tourism and catering in times of delta (and recently omikron). But in part, the Chinese government has also inflicted economic damage on itself, with a sudden wave of regulation in the tech, tutoring and entertainment industries, and aggressive deleveraging in the real estate sector.
President Xi seems to have started a major clean-up since last summer: large tech companies were fined billions for monopoly formation or violations of data privacy. The popular sector of after-school private lessons was abolished. And the entertainment sector was imposed stricter censorship: a lot of TV shows and movies were removed. The result: plummeting stock market values, layoffs and wiped out growth.
The problems in the construction sector also started with stricter regulations: the introduction of strict debt limits caused real estate giant Evergrande to falter, causing unrest throughout the sector. While Evergrande is now slowly being dismantled, home sales have plummeted. With 30 percent of China’s GDP coming from real estate, this is shaking the economy to its foundations.
Retail growth: 3.5 percent (Q4 2021)
Xi’s cleaning is focused on old dirt. The Chinese economic model, based on investment, debt and exports, is past its sell-by date. China wants a new model based on consumption and innovation. Xi has intervened in the real estate sector to limit debt build-up, in the tech sector to fuel innovation, and in the tutoring sector to save household budgets, or in Xi’s words, create ‘common prosperity’.
The interventions were met with mixed feelings: while they address abuses, such as expensive tutoring or privacy violations by big tech, they also increase government control. “There is an element of control in it, but there are also things that are good for Chinese society,” said Bert Hofman, director of the East Asia Institute at the National University of Singapore and former China director of the World Bank. “The Chinese government says: our private companies should work for the greater good of our society. Many western countries share that philosophy.’
But what the wave of regulation failed to do is bring China closer to its new growth model. The Chinese economy remained highly dependent on exports in 2021 (23.3 percent growth in the fourth quarter), while retail growth (3.5 percent in the fourth quarter) fell short of expectations.
Unemployment: 5.1 percent (December 2021)
The Chinese government wants a consumption-driven growth model, but Chinese consumers are keeping their budget tight. The zero-covid policy, with its sudden travel restrictions and lockdowns, is putting a damper on tourism and catering. The wave of regulation has cost hundreds of thousands of jobs in the tech, entertainment, tutoring and real estate sectors, hurting consumer confidence.
Officially, the unemployment rate in China is not too bad: 5.1 percent. But Chinese unemployment figures are notoriously unreliable. They do not take migrant workers into account: if they cannot find work in the city, they are expected to return to the countryside and support themselves. And they delete everyone who is not available for the labor market, for example due to quarantine.
In the past quarter, news regularly came out about layoffs at companies affected by the regulatory wave. iQiyi – the Netflix of China – laid off 20 percent of its staff, Kuaishou – a competitor of Tiktok – 30 percent. Tutoring institute New Oriental announced that it had laid off 60 thousand of its 105 thousand employees. Evergrande, which it says indirectly creates 3.8 million jobs every year, is a battlefield.
Even without reliable figures, there are signs of rising unemployment in China. More and more women are active as parcel or meal deliverers, traditional shelter jobs for those who are out of work. Neighborhood wardens and cleaners, also a typical emergency solution, seem to be getting younger and younger. There are more and more street vendors on the streets of Beijing. And the number of participants in state exams to get a government job was 1.6 million higher than in 2019.
Charity: 0.21 percent (2020)
‘Increasing consumption is not easy’, says Jue Wang, assistant professor of Chinese economics at Leiden University. ‘It’s not: last year everyone bought one TV, this year they’re buying two. You have to look at the distribution of wealth, at incomes and savings, at health care and pensions. People should feel safe enough about the future to spend their money today.’
Experts agree: To increase consumption, China needs to make major reforms in its social security and tax system. The money should go less to state enterprises and local governments, and more to low incomes and social services. ‘That is about a lot of money and political interests,’ says Hofman: ‘The current tax system in China does not redistribute. But reforming that doesn’t make you popular.’
“Beijing does not seem prepared to implement these structural changes,” said Jacob Gunter, economic analyst at the German think tank Mercator Institute for China Studies (Merics). According to him, the measures that have been taken so far are insufficient and sometimes go in different directions. ‘In many ways it resembles that Dutch boy who stuck his finger in a crack in the dike to stop the water, but cracks keep appearing all the time.’
Xi has been hammering on ‘common prosperity’ since last year. But it remains vague what that means, except for billions of dollars in donations from large companies. China could use more charity: donations increased from 0.14 to 0.21 percent of GDP in 2020. ‘But that doesn’t make a huge difference,’ says Hofman. Even in the world’s most generous countries, barely 1 percent of GDP is spent on charity. “That’s not enough to redistribute.”
According to many experts, it is also contradictory to want to increase innovation while increasing government control over private companies. The Chinese government thinks it can stimulate innovation through state subsidies and intervention, while innovation normally benefits from fewer rules. Curbing big tech may have positive aspects, but the aggression with which it happened has not done business confidence in China any good.
“Xi promotes the idea that state-owned companies should be given more resources for innovation,” said Gunter. ‘That’s laughable. No serious observer thinks that SOEs are good at innovation. They are gigantic, bloated entities that don’t handle capital very efficiently.’
Growth forecast: 4.3 to 5.5 percent (2022)
Analysts expect China to maintain a low growth rate this year. The government is sticking to the zero-covid policy for the time being, and the transition from investment-driven to consumption-driven growth continues to falter. Many economists predict growth just above 4 percent for 2022, but Beijing would probably like to reach 5 percent for political reasons. In 2022, the important Party Congress will take place, at which Xi wants to win his third term. That includes good numbers.
The big clean-up will therefore be put on a break this year to make way for stimulus. On Monday, China’s central bank announced a rate cut on medium-term loans. Deleveraging, decarbonising the economy, curbing real estate speculation will be pushed aside as growth slows, Gunter says. “Xi cannot afford much lower growth in the run-up to the Party Congress.”
Stability, that is the mantra for 2022. Only when Xi is firmly back in the saddle in 2023 and a new five-year term starts, can the big clean-up start again. Even then, the question remains whether the major challenges – the reform of social security and the tax system – will be tackled. And whether Xi will give the private sector some more leeway, or continue with his expansion of state intervention.
Bert Hofman of the East Asia Institute is cautiously optimistic. “In the 1990s, China made very difficult reforms. They take their time, but in the end they do what it takes.’ University lecturer Jue Wang also thinks that the Chinese government is pragmatic enough to liberalize further. But she sees other insecurities. “How the economy does depends on what happens with the pandemic, with trade relations with the rest of the world, with investment projects outside China.”
Jacob Gunter of think tank Merics is more skeptical about the future. “I feel some pity for Chinese administrators: they face so many challenges that have their roots in the past decades, but are now maturing as growth slows down. They need to deleverage, combat global warming and risks in the economy, modernize the military, all while a demographic crisis looms. China is good at combating crises, but these are a lot of crises at the same time.’
Birth rate in China to historic low
In 2021, 1.4 million fewer children were born in China than a year earlier, China’s national statistics office announced on Monday. 10.6 million babies were born in 2021, compared to 12 million in 2020. Although Beijing eased birth restrictions in 2015 and allowed three children since last year, the birth rate is the lowest since 1949 at 7.52 babies per thousand. Raising a child is very expensive. The Chinese government is trying to do something about this, such as by abolishing the private tutoring sector.