As the world starts to slowly recover from the grips of the pandemic, China has been the one success story to come of it thus far. As the first country to suffer from the virus, they were also the first to get under control and open up again to the world. But now, with recent news of increasing unemployment and slowing economic activity, is China’s recovery about to stall? We take a closer look at the current situation and evaluate the risks of China’s revitalization.
1. Examining China’s Economic Resurgence
China’s economic resurgence is one that cannot be ignored, or understated. It has seen tremendous growth in a relatively short amount of time, rising to become the second largest economy in the world. To understand why these changes have occurred, we must examine certain factors:
- Infrastructure Investment: One of the key drivers of China’s resurgence has been massive infrastructure investment, including increased transportation networks, internet access and power generation.
- Strong Manufacturing Industry: As a result of this development, the country enjoys a large and strong manufacturing sector, which has driven domestic consumption and export revenues.
China has also embraced technology and innovation, with government programs incentivizing research and development, as well as start-up investments in the tech sector. This has allowed China to become a leader in the global technological development and manufacturing landscape.
2. Predictions of a Slower Recovery
With an ongoing pandemic and various other factors, such as a slower rate of vaccinations, many have predicted that the economic recovery from it will be slower than expected. In order to best prepare for the recovery period, here is an overview of what to expect:
- Lower job vacancies
- High unemployment rates
- Decrease in wages
- Lack of consumer demand
- Increasing costs of commodities
The most significant impacts of the slower recovery will be the repercussions felt in the labor market. The return to pre-pandemic levels of growth may take much longer than expected, resulting in more people jobless longer than anticipated. The availability of jobs will be limited due to the declining consumer demand, accompanied by wage cuts for those who have returned to work.
The cost of commodities are also expected to climb, and combined with a stagnant labor market, people will be forced to tighten their purse strings as to not overload themselves financially. Despite the gloomy outlook, the financial and labor market can only recover and adapt once a more long-term solution to the pandemic is reached.
3. Challenges to the Chinese Economy
The Chinese economy appears to be thriving, but there are still some major challenges ahead. With growth slowing, inflation rising and a debt driven credit boom, these are the key issues that Chinese policymakers must tackle in order to sustain long-term growth:
- Slowing growth of its economy
- Large population
- Decreasing competitiveness in global markets
- Lack of innovation
The economy’s reliance on investment-led growth has left it poorly positioned for the future. Moreover, the aging population is contributing to higher labor costs, further eroding China’s competitiveness. In order to sustain long-term economic growth, China must continue to develop its human capital, attract and retain talent, and improve its innovation capabilities.
- High debt levels
- Bubble risks in the stock markets
- Regulatory uncertainty
- Exposure to global financial markets
Despite efforts to deleverage and reduce financial risks, China’s financial system is still vulnerable to volatile external shocks. Chinese banks’ exposure to foreign currency debt, as well as their strong ties to state-run enterprises, add to the country’s financial risks. Additionally, a lack of regulatory clarity and oversight has resulted in a lack of confidence in Chinese stocks and other asset classes.
4. A Weakening Outlook for the Future?
With each day, we keep going further into the unknown. Many experts believe that the long-term outlook for the future, especially economically, is not looking good. There are several potential factors contributing to this weaker future.
- Trade Wars: The increasing trade wars between countries around the world have caused significant economic damage, potentially leading to a weakened outlook for the future economy.
- Political Uncertainty: Political uncertainty has caused investors to lose confidence in the future, making it less likely that the economy will improve.
- Global Debt: The global debt crisis has caused many countries to be unable to pay back the money they owe, which is a huge economic burden and could lead to an economic slowdown.
- Oil Prices: Oil prices continue to increase, leading to an increased cost of living that could prove unsustainable in the long-run.
It is clear that the outlook for the future is worrying. However, it is important to note that there are actions that we can take to protect ourselves and prepare for a weaker future. We must remain vigilant in monitoring the economic landscape and be ready to take action in the event that the outlook takes a turn for the worse.
As China’s recovery continues, and investment, activity, and optimism are increasing, the country must remain vigilant against any potential impediments. Keeping a close eye on global and domestic trends will help ensure that China’s economic recovery continues strong and smooth.