China’s Economic Woes

Members of Congress are growing increasingly concerned about economic competition with China. In 2022, President Biden signed the CHIPS and Science Act into law to decrease US reliance on Chinese-made semiconductors. The following year, the president signed another law, the Protecting American Intellectual Property Act, to sanction foreign companies for stealing American companies’ intellectual property. Most recently, a bipartisan group of senators introduced a bill titled the American Economic Independence Act to counter national security risks related to economic entanglement with China.

Initially, this bill was seen as Congress sounding alarm bells because China’s economy is growing quickly and poised to overtake the US economy if Congress does not act. However, recent projections show China’s gross domestic product (GDP) may never overtake US GDP, or at least not for many decades. Since 1978, China has achieved an average annual GDP growth rate of about 9%, but in 2023, China’s GDP growth rate was roughly only 5.2%. Many analysts question whether the Chinese government overestimated this figure. According to projections from Bloomberg, China’s growth rate may slow to nearly 1% by 2050. In comparison, US GDP growth has hovered around 2% in recent decades and is expected to stay close to that figure in the future. China’s economic slowdown is caused by many factors, but two stand out as the most severe: a huge hidden debt problem and a collapsing real estate market.

China has between $7 trillion and $11 trillion in off-balance-sheet, or “hidden”, government debt. That amount is in addition to the country’s central government debt of about $3.8 trillion and explicit local government debt of about $4.8 trillion. Much of China’s hidden debt comes from local government financing vehicles, which are essentially shell companies created to borrow money. These financing vehicles were initially created to get around restrictions on borrowing created by the central government, and local governments in China use them to borrow money for infrastructure projects to stimulate local economies. However, many Chinese local governments cannot afford to pay back what they borrowed. Economists estimate that between $400 billion and $800 billion of this hidden debt is at risk of default.

Just a year ago, the main concern was not that any local governments would default and prompt a financial crisis, but that these governments would have to cut or delay spending and investments to make debt payments, hurting long-run growth. However, in May of 2023, a utility provider in the capital city of debt-laden Yunnan province repaid a portion of its debt a day late, and in October 2023, a state-owned tourism organization in Shandong province missed $14 million in payments on its debt. China’s central government is taking steps to mitigate the problem, such as shifting debt from cities to provinces, offering loans to local governments through state banks, and creating an emergency liquidity fund administered by the country’s central bank. However, these steps do not solve the underlying problem of local governments’ massive debt that still must be paid back in coming years. The average time to maturity of Chinese municipal bonds is about 4.5 years, but many local governments will choose to rollover this debt by issuing new bonds to pay back the old bonds. Unfortunately, this does not solve the underlying debt problem.

China also has a real estate problem. Before 2020, real estate comprised about 25% of China’s GDP. This is because people in China often invest their savings in real estate due to a lack of good alternative investments. To prevent a housing bubble from forming, Chinese regulators limited banks’ exposure to real estate, reduced the frequency of residential land auctions, and created the “three red lines” system to restrict heavily indebted property developers from borrowing more. Specifically, the new regulations limit how much debt developers can take on relative to their cash on hand, asset values, and equity ratios. The rules also require developers to provide more detailed information to the government about their debt levels.

As a result of this system, many property developers defaulted on $6.2 billion of debt as of 2021, a larger amount than in the previous decade combined. China Evergrande Group exemplifies China’s real estate crisis. Evergrande was one of the country’s largest developers until a Hong Kong court ordered the company’s liquidation to pay back its creditors in January 2024. In February, the price of secondhand homes in China’s 70 most developed cities fell 6.3% compared to the same month last year, the worst year-on-year downturn since 2011 when the government started releasing this data. This decrease in home prices has impacted consumer confidence, which is at its lowest number in decades. If consumer confidence remains low, China will have an even harder time reviving its growth rate.

In response to the crumbling of the real estate sector, the central government is planning two new initiatives. The first plan is to buy distressed projects from private developers, convert them into homes, and then rent or sell the homes to consumers. The second program will have the government build more subsidized housing itself rather than leave the task to private developers. However, this plan will cost a total of about $1.4 trillion over the next five years, which is a problem for a country already deep in debt.

After reviewing the data, China likely is not the economic threat that Congress thinks it is. China has economic growth, debt, and property sector problems, not to mention the country’s many other problems including deflation, a shrinking population, and declining foreign investment. While it is not necessarily wrong for Congress to pass laws to try to increase the US economy’s competitiveness with China’s, recent legislation has not been well supported by China’s unimpressive economic performance.

China is facing similar problems to those of Japan in the 1990s, and today Japan is a wealthy country, but not the economic powerhouse many commentators feared it would be in the 1980s. While the national security establishment should continue to monitor China for threats such as communications equipment in Chinese-made cranes, policymakers do not need to fret about China’s growth, or lack thereof. Instead, lawmakers can spread their efforts out more broadly to make the US more competitive with a variety of developing countries that will be larger players in the coming decades, such as India, Indonesia, and Brazil in addition to China. This could include easing immigration restrictions for STEM graduates, pursuing World Trade Organization cases against all countries that violate US companies’ intellectual property rights, and liberalizing trade with allies and countries competing with US adversaries. These improvements would make the US more competitive across the board, cementing the US’s status as the most productive economy in the world.