Is China's Economy Heading for Collapse? What We Know

Seven months after the end of China's COVID-19 policies, the country's economy is growing slower than expected, hitting a slump that has raised concerns over whether it is heading toward a collapse.

In July, it was reported that China's annual rate of GDP growth was slowing down and appeared to be stabilizing at around 4 percent—a level that's hardly comparable to the incredible growth the country has experienced in the past two decades.

Beijing has so far resisted offering any kind of economic stimulus, and it's unclear what the policy direction is going to be in terms of helping out the country's struggling economy. Earlier this month, the People's Bank of China cut its key interest rate for the second time in three months.

Is China's economy heading toward a collapse? These are the signs that are playing a part in the country's growth slowdown and worrying observers about a potential crash.

High Youth Unemployment

China's stunning economic growth in the past two decades created a new bourgeoisie class and improved the living conditions of many of its citizens, with the country declaring last year that it had lifted nearly 800 million people out of poverty.

But the unspoken social contract between the Chinese people and the Chinese Communist Party—acquiescence to a non-democratic system in exchange for economic progress—has recently been broken, with youth unemployment rising significantly this year.

Earlier this month, China decided to stop releasing youth unemployment figures after data from June showed that the country's jobless rate for 16-to-24-year-olds in urban areas had reached a record of over 20 percent.

China's overall unemployment rate had risen to 5.3 percent last month.

A Weaker Yuan and Deflation Woes

The Chinese yuan fell to its lowest level in 16 years last week, worrying investors about the state of the world's second-largest economy. In response to the plunge, the People's Bank of China set the currency at a much higher rate than its actually estimated market value.

On top of the yuan crisis, the National Bureau of Statistics of China (NBS) reported that the country's economy has officially fallen into deflation after consumer prices fell year-on-year in July—by 0.3 percent—for the first time in over two years.

While China's economy seemed to be recovering at an excellent speed since the end of its COVID-19 policies, the growth came to something of a grind in April, partly due to slower domestic spending.

While Western countries, including the U.S., have been battling with the opposite problem—trying to bring down rampant inflation—deflation for China means weaker trade, weaker sales, and a weaker outlook for its factories as the prices of goods fall as demand wanes.

The country's trade also fell more sharply than expected last month, with imports dropping 12.4 percent year-on-year and exports falling by 14.5 percent, as global demand for Chinese goods tumbled.

There were also more troubles coming from the stock market in China.

On Friday, Hong Kong's Hang Seng Index (HSI) fell into a bear market after dropping by over 20 percent from its January peak.

A Worsening Property Crisis

China's real-estate sector, which had been booming in recent decades and currently amounts to more than a quarter of all economic activity in the country, has not been faring so well since the pandemic—and its crisis is only deepening.

Heavily indebted developers, who drove China's economic transformation in recent decades, are now in trouble after new borrowing rules were introduced in 2020 to slow down the housing market and prevent a bubble.

These measures left many of the developers who had taken risky loans to finance the building boom through the years short on cash—and unable to pay back investors.

The impact of this move has been made clear by the recent demise of Country Garden, which used to be China's largest developer by property sales, and Zhongrong Trust, a major investment trust that managed $87 billion worth of funds as of the end of 2022.

Real-estate giant Country Garden is currently on the brink of default after missing two US dollar coupon payments worth $22.5 million earlier this month. Zhongrong Trust has also reportedly missed payments to corporate investors for a total of $15 million, raising concerns over a rumored liquidity crunch that could trigger a wider financial crisis in China.

Soaring Local Government Debt

As real-estate developers struggle in a slowing market, local governments are losing money on their land sales, developing a concerning amount of debt. This debt, in turn, puts more pressure on Chinese banks and weakens the government's ability to improve its public services—exacerbating the risk of a financial crisis in the country.

Land sales typically amount to 40 percent of local government. China's outstanding government debt was over 123 trillion yuan—or $18 trillion—last year. Almost $10 trillion of this was what's known as "hidden debt," contracted by local government by financing platforms backed by cities or provinces.

Demographic Pressure

For centuries, China had been the most populous country in the world, a record that was snatched in April by India.

This isn't good news for the Chinese economy, which owes much of its transformation to its large workforce. Its population growth has not only slowed down, but it's likely to decline faster in decades to come, according to the Brookings Institute, a Washington-based nonprofit.

"A working-age population that peaked in 2011 at more than 900 million will have declined by nearly a quarter, to some 700 million, by mid-century," the think tank wrote. "These workers will have to provide by then for nearly 500 million Chinese aged 60 and over, compared with 200 million today. America's social security challenges seem like a policy picnic by comparison."

A demographic slowdown in China will leave the country with fewer available workers—and more retirees to take care of.

Is China's Economy Likely To Get Back On Track?

"Nothing is sure, but the probability is high that the economy should stabilize at some slower pace before long," Guonan Ma, senior fellow on Chinese economy at the Asia Society Policy Institute's Center for China Analysis, told Newsweek.

"Indeed, Beijing is struggling to strike a balance between short-term stimulus on the one hand and moving away from a property-heavy and debt-heavy growth model on the other, which in part explains why Beijing is hesitant to launch a massive stimulus so far. But some policy stimulus is still warranted."

Win Thin, global head of markets strategy at Brown Brothers Harriman, said that China had only introduced limited stimulus measures until now. "That is because the old model of debt-fueled growth is coming back to haunt them," he told Newsweek.

"Several property developers and wealth managers with heavy exposure to property have missed payments in recent weeks," he continued. "I believe that some sort of major debt restructuring with haircuts and losses will eventually be seen. It's anybody's guess, but they could muddle through for months or years. However, with debt/GDP approaching 300 percent, China can no longer grow their way out of this dilemma. I don't expect them to meet this year's growth target of 'around 5 percent'."

Update, 8/24/23 9:45 a.m. ET: This article was updated to include comment from Guonan Ma and Win Thin.