China’s watershed moment


While there are some signs of increasing economic activity, that will continue to weigh on growth for at least the first part of this year.


Even if the optimists are proven right and the worst of the wave of infections occurs in the first quarter, it will still take a very strong recovery in retail sales and in the property sector to return to the targeted levels of growth.

Retail sales essentially flat-lined last year, growing a meagre 0.2 per cent. A major plank of any recovery story will be a recovery in domestic consumption, no doubt helped by large infusions of fiscal and monetary stimulus.

Consumption could be constrained, however, not only by continuing outbreaks of COVID, but by relatively high levels of unemployment, particularly among younger Chinese. Urban unemployment is 5.5 per cent, but the unemployment rate among those aged 16 to 24 is almost 17 per cent.

Even more challenging will be the attempt to reflate China’s stricken property sector.

The authorities have eased the “three red lines” policy that caused the sector to implode and are providing finance to key developers, lowering mortgage rates and relaxing prudential requirements to stabilise the developers and stimulate demand.

But stability in a sector, which used to represent about a third of China’s economy, will be difficult to achieve, let alone significant growth.

Xi’s legacy will be defined, not by whether China can achieve a reasonable rebound in its economy this year or next, but by how he responds to the threats latent in China’s demographic challenges.

Property investment fell 10 per cent last year and sales of property almost 27 per cent. Consumer confidence in the pre-sales model the industry pursued before its implosion – buyers paid the price for undeveloped apartments upfront, and many have been left with mortgages but no properties – has been undermined and won’t be easy to restore.

The same could be said about the developers’ access to offshore funding after the spate of defaults on offshore bonds.

The international slowdown, coupled with China’s domestic issues last year, was reflected in a 9.9 per cent decline in exports and a 7.5 per cent fall in imports in December relative to December 2021.

Fewer COVID-related disruptions to factories and domestic supply chains and an increase in domestic consumption might help boost trade-related activity, but the global slowdown and geopolitical tensions are likely to temper the expected recovery.

In other words, a return to something resembling the pre-COVID normal of mid-single-digit growth numbers is possible now that the economy has re-opened from its pandemic-driven self-isolation, but its achievement won’t be straightforward or inevitable.

If the near term looks challenging, then the longer term is even more so.

An ageing population in a command-and-control economy dominated by state-owned enterprises with poor productivity isn’t a good foundation for economic growth.

High levels of debt and leverage within the economy and Xi’s shift in emphasis from generating wealth to redistributing it will, despite some moderation of tone and some lifting of restrictions on private sector activity, also weigh on growth.

The shrinking of China’s population, for the first time since 1961, well before China could transition from being a middle-income country at best to something resembling economies like those of the US or Europe has profound implications for its economy’s ability to grow and for its geopolitical ambitions.

Japan, from a considerably more affluent starting point, crossed a similar threshold when its population began shrinking in 2010 in an economy which already had long-term structural problems. Despite extraordinary monetary and fiscal measures, its economy has stagnated.

A smaller population means a smaller pool of the cheap labour that has propelled China’s growth over the past half century.

A smaller and ageing population in a country with inadequate health infrastructure and social welfare nets and which is already over-leveraged will generate economic stress and social tensions within an economy which already has significant financial inequality.


The demographic trend, which appears irresistible, will have implications for the rest of the world too – and Australia in particular.

Less demand for housing and goods within China from a smaller population means less demand in the long term for commodities such as iron ore, coal and LNG.

China’s position as the world’s factory floor and as an attractive and growing market for western companies would also be threatened if a shrinking pool of workers is reflected in higher costs for labour and a dwindling pool of domestic consumers.

Xi’s legacy will be defined, not by whether China can achieve a reasonable rebound in its economy this year or next, but by how he responds to the threats latent in China’s demographic challenges.

Without changes to the economy that are more fundamental than boosting productivity and slashing debt levels, his ambition to overtake the US in economic, military and geopolitical capabilities and influence will be exposed by history as empty hopes.

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