It has been a year since China relaxed the “zero COVID-19” 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 last 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 Chinese 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 last year. In addition, the Chinese consumer price index continued to fall in the last quarter of last year, 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.
However, worst of all is that 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 Chinese 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 high-profile arrests of entrepreneurs and draconian crackdowns on finance, technology, private tutoring and real-estate sectors. This loss of confidence is reflected in China’s stock market, ranked among the worst-performing. 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 percent of employment opportunities and is critical in innovation. Recent graduates are increasingly failing to find jobs. Peking University associate professor Zhang Dandan (張丹丹) said that the youth unemployment rate might be as high as 46.5 percent. Though that figure is hotly contested, there is little doubt that unemployment is higher than the official rate, which stood at 21.3 percent in June last year before the Chinese National Bureau of Statistics (NBS) stopped reporting it.
While the NBS resumed reporting youth-employment data last month, its estimate of a 14.9 percent 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. Such a lack of transparency has further undermined public trust and diminished confidence in the Chinese government.
Local governments, too, are losing the public’s trust, owing to their soaring debts and the real-estate crisis. In Wuhan, elderly people are protesting reductions in their medical-insurance benefits. 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 troubles have even extended to civil-service positions, once considered economic sinecures. Last year, nationwide frustration among this cohort grew, following significant cuts to annual bonuses. 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 bleak indicators, there has been a discernible shift in the economy toward a less productive state-led model. Research from the Peterson Institute for International Economics said that the state’s share in China’s 100-largest listed companies increased from 57 percent to 61 percent over the first half of last year, resulting in the private sector’s share dropping below 40 percent. Moreover, while 27 of the top 41 real-estate firms — those with at least 100 billion yuan (US$13.9 billion) in annual revenue — were private enterprises in 2021, only three of the 16 leading firms were privately owned last year.
Restoring business confidence is crucial to address China’s mounting financial and economic problems. A mere decade ago, global optimism about China’s developmental trajectory was brimming over, fueled by glimpses of liberalizing, market-oriented economic reforms.
However, 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 (習近平) Thought” in daily life.
Such measures would run counter to the ideology-driven leadership of the current regime. However, without a meaningful shift in policy and mindset to support the private sector and revive confidence among investors and entrepreneurs, China would face a prolonged period of economic underperformance and stagnation.
Catherine Tai is deputy director for Asia and Renee Luo is a research assistant at the Center for International Private Enterprise.
Copyright: Project Syndicate
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