Business Matters |  Will this be the Chinese economy’s ‘lost decade’?

In this episode of Business Matters, we discuss what is happening with the Chinese economy and whether India can draw any lessons from China’s phenomenal growth, and its decline.

The annual business confidence survey released recently by the European Chamber for Business in China showed a sharp deterioration in sentiment. It said 64% of respondents reported that doing business in China became more difficult in the past year, the highest on record. 

An Associated Press story quoted the chamber’s president as saying business confidence in China is “pretty much the lowest we have on record,” and that there was no expectation that the regulatory environment is really going to improve over the next five years. 

What exactly is happening with the Chinese economy? 

The Chinese economy grew 3% in 2022 – one of the weakest performances in about half a century, and far lesser than the government’s target of 5%. In the quarter ended March, GDP growth rebounded to 4.5%. But again, April and May have seen a weakening that might influence growth in the rest of the year. 

A note by the Rhodium Group showed that 2,892 local government financing vehicles (LGFVs) reveal “a rare decline in overall cash positions, relative to rising interest costs and debt levels.” 

The group says the current weakness of localities’ finances prevents Beijing from utilising fiscal policy to support the economy. In fact, this is the primary reason that there has been no meaningful fiscal support for China’s recovery so far this year. Public calls for Beijing’s assistance from a couple of provincial governments mark “the beginning of the end of local governments’ rapid debt accumulation”. 

Guiyang’s government claimed in a summary of work in 2022 that default could occur at any time, while Hohhot cited heavy debt burdens and interest costs, claiming they had limited capacity to manage their debts. These cries for help will likely be followed by those from other provinces, the group says.