China in 'Damage Control Mode' Over Faltering Economy—Analysts

The reported growth of China's economy in the last year, with its gross domestic product (GDP) expanding 5.2 percent according to the latest official data, doesn't mean that the country's troubles are over yet, according to analysts.

The second-largest economy in the world has weakened in the past few years, due to high debt, an aging workforce, slower internal demand, and an ongoing crisis in the real estate sector—the force that had driven much of its explosive growth in the last few decades. These factors were compounded by the COVID-19 pandemic, with the country imposing drastic measures including its zero-COVID policy which lasted until December 2022.

Experts previously told Newsweek that China's growth is never going to go back to pre-pandemic levels. In the final three months of 2023, output rose at an annual pace of 4.1 percent—a level that's incomparable to the country's economy's peak years (like 2007, most recently), when it grew by more than 13 percent.

Craig Singleton, senior China fellow at the non-partisan Foundation for Defense of Democracies, said Chinese Prime Minister Li Qiang's latest claims on the country's GDP "are just not credible."

Newsweek has contacted the Embassy of the People's Republic of China in Washington D.C. for comment.

Singleton told Newsweek that for nearly two decades, China has falsely claimed its GDP either met or exceeded the government's pre-determined target. "Focusing on China's false GDP figures risks missing the forest for the trees," he said, adding that the prospects for the country's economy are less than rosy.

"The days of China's sky-high growth are over," Singleton said. "Going forward, Chinese decision-makers will be forced to contend with an increasingly complex and dire economic landscape, one in which its state-owned enterprises, provincial and local governments, private companies, and citizens will be made to compete for a piece of a piece that is no longer growing," he said.

"All the while, investor risk will increase this year as the party deepens its reach into China's ostensible private sector."

For Singleton, China has only a few tools available to boost its economy.

"With Chinese consumption likely to remain low, Beijing appears poised to employ an all-too-familiar playbook to address its economic challenges: cut prices and export excess capacity worldwide," he said.

This strategy poses a significant risk to the U.S. and other nations, according to Singleton, if China floods the market with cheap goods, potentially undercutting domestic producers.

"There is no getting around the fact that China is in damage control mode, attempting to project a sense of stability to the international community while grappling with myriad domestic challenges. If ever the cliché 'investor beware' applied, it's now," Singleton said.

That the Chinese economy hasn't quite recovered to pre-pandemic levels has been evident in the steep decline experienced by its stock market in the past year, a dramatic downturn that has continued in the first weeks of 2024. On Wednesday, China's CSI 300 was down by 2.18 percent. The global markets, on the other hand, have surged in the past year, with the S&P 500 skyrocketing 24 percent in 2023.

According to Thomas Mathews, a senior markets economist focusing on bonds and equities at Capital Economics, "China's faltering economy seems to be a big driver of its poor stock market returns lately."

This poor market performance is "reflected in lackluster growth in the profits of its listed companies but also, I suspect, growing worries about a 'hard landing' in the economy which could be precipitated by its struggling property sector," Mathews told Newsweek.

However, the economist doesn't think there's one single factor responsible for the freefall of the Chinese stock market.

"For one, the stock market has delivered poor returns over much of the past couple of decades, even when China's economy was doing quite well," Mathews said. "Part of the recent struggles probably reflect China's strained relations with the U.S., which have probably made global investors wary, especially after what happened to investments in Russia," he said.

"And the authorities' attitude towards the private sector there has understandably made investors nervous, too."

A recent Bloomberg report said that China's state-owned banks are tightening curbs on funding to Russian clients as they fear being subjected to secondary sanctions from the U.S.

According to Mathews, investors are so pessimistic about the country's equities right now "that there is scope for them to do a bit better than others in the near term." But, Mathews said, "it is hard to see them generating good long-run returns given the headwinds the country's economy faces."