It has been a year since China relaxed the zero-Covid measures that had been stifling economic activity, but the country has yet to experience the rebound that policymakers and pundits anticipated. Instead, economic indicators from the past year have painted a disheartening picture.
The fallout from the massive property developer Evergrande's 2021 collapse is far from over, and the sector continues to struggle, even after the government relaxed purchasing restrictions in cities like Guangzhou and Shanghai. China's financial health has also declined as local government debt has snowballed, leading Moody's to downgrade the country's credit outlook in December. And the Chinese consumer price index continued to fall in the last quarter of 2023, indicating a lack of domestic demand.
Compounding these problems are worries about high youth unemployment, cutbacks in public services, and salary reductions for public employees. But worst of all, private-sector confidence has eroded, threatening China's ability to attract investment and sustain economic growth.
These challenges are generating public apprehension and sparking increasingly heated discussions, even within China's tightly censored and regulated information environment. After hearing repeated public declarations of support from senior Chinese leaders, there are increasing signs that the private sector has lost confidence in policymakers. Though the government has rolled out stimulus measures, its focus clearly remains fixed on official policy goals, such as domestic stability and ensuring a strong Communist Party presence in all institutions, from schools to the private sector.
Not surprisingly, a survey by the Cheung Kong Graduate School of Business of private firms across the country found widespread pessimism about the business environment and their ability to generate profits. Business leaders view official statements as empty rhetoric, and they have not forgotten the recent high-profile arrests of entrepreneurs and draconian crackdowns on finance, technology, private tutoring, and real estate. This loss of confidence is reflected in China's stock market, now ranked among the worst performing globally. For the first time in a quarter-century, China has a negative balance of foreign direct investment, implying that capital is leaving the country.
The youth-unemployment rate is another canary in the coal mine, since the private sector accounts for more than 80% of employment opportunities, according to government figures, and plays a critical role in innovation. Recent graduates are increasingly failing to find jobs. Zhang Dandan of Peking University estimates that the youth unemployment rate may be as high as 46.5%. Though that figure is hotly contested, there is little doubt that unemployment is higher than the official rate, which stood at 21.3% in June 2023, before the National Bureau of Statistics (NBS) stopped reporting it.
While the NBS resumed reporting youth employment data last month, its estimate of a 14.9% rate excluded students aged 16 to 24. Other international calculations include this group, highlighting a deviation from standard practices, and the change in methodology was not disclosed to the public. Such lack of transparency has further undermined public trust and diminished confidence in the government's economic management.
Local governments, too, are losing the public's trust owing to their soaring debts and the real-estate crisis. In Wuhan, the elderly are protesting reductions in their medical insurance benefits. And in Guangzhou and Dalian, residents recently learned that local authorities had tapped into public medical-insurance funds to pay for mass Covid-19 testing.
China's financial troubles have even extended to civil-service positions, once considered economic sinecures. In 2023, nationwide frustration among this cohort grew following significant cuts to annual bonuses. In fact, Chinese civil servants must not only cope with salary reductions but are also required to return bonuses they have previously received.
In addition to all these worrying indicators, there has also been a discernible shift in the economy toward a less productive state-led model. According to researchers at the Peterson Institute for International Economics, the state's share in China's 100 largest listed companies increased from 57% to 61% over the first half of 2023, resulting in the private sector's share dropping below 40%. Moreover, while 27 of the top 41 real-estate firms -- those with at least CN¥100 billion (498.2 billion baht) in annual revenue -- were private enterprises in 2021, only three of the current 16 leading firms were privately owned in 2023.
Restoring business confidence is crucial to addressing China's mounting financial and economic problems. A mere decade ago, global optimism about China's developmental trajectory was brimming over, fuelled by glimpses of liberalising, market-oriented economic reforms. But the hope that private businesses would soon be able to thrive in China has been shattered. It has become increasingly difficult for the private sector to innovate, attract investment, and generate jobs for younger workers. Reviving the buoyant sentiment of the past would require a government that is willing to embrace reform-minded economists and technocrats, and eager to support the entrepreneurs who have been fundamental to growth in recent decades.
With the central government struggling to revive the economy, a different approach is clearly needed. That means moving beyond rhetoric and releasing entrepreneurs who have been detained for expressing dissenting views, consulting a variety of experts on economic policy proposals, and reducing ideological influences like "Xi Jinping Thought" in daily life.
Such measures would run counter to the ideology-driven leadership of the current regime. But without a meaningful shift in policy and mindset to support the private sector and revive investor confidence, China will face a prolonged period of economic underperformance and stagnation. ©2024 Project Syndicate
Catherine Tai is Deputy Director for Asia at the Center for International Private Enterprise. Renee Luo is a research assistant at the Center for International Private Enterprise.