Published on: January 5, 2025 / Update from: January 5, 2025 - Author: Konrad Wolfenstein
China in transition: New paths in the global economy and challenges of the Chinese economy - what lies ahead? – Creative image: Xpert.Digital
China in transition: New paths in the global economy and challenges of the Chinese economy - what lies ahead?
The Chinese Economy: Current Developments and Challenges
The Chinese economy has undergone impressive development in recent decades and has become one of the most important economies in the world. But the rapid growth that once characterized China has slowed noticeably in recent years. In addition to the opportunities arising from China's economic dynamism, the country now also faces significant structural challenges. In this article, we take a look at the current state of the Chinese economy, analyze key issues and highlight the government's strategies to overcome these hurdles.
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Economic growth and current trends
In 2023, China's gross domestic product (GDP) reached about $17.8 trillion, maintaining its place as the world's second largest economy. Real GDP growth was 5.2 percent - an impressive rate compared to many other countries, although significantly lower than in previous years. While the economy grew by an average of almost 9 percent per year in the 1990s, experts predict growth of just 4.8 percent for 2024. In the long term, even lower growth is expected, which could fall to around 3 percent by 2030 and 2 percent by 2040.
China is currently pursuing a strategic realignment towards a green-oriented economy. The country is considered a global leader in renewable energy production and is relying on sustainable technologies to drive the next phase of economic growth. In addition, China's capital markets are expected to grow from the current $30 trillion to $100 trillion over the next decade. This so-called “Big Bang of Finance” is supported by structural reforms, including the liberalization of pension provision and the diversification of investments.
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Key challenges
Despite its achievements, China faces a variety of challenges that threaten economic growth and stability in both the short and long term:
1. Demographic change
China's population structure is changing drastically. A rapidly aging society and a shrinking workforce pose significant risks. The birth rate has reached historic lows and the average age of the population is steadily increasing. This will not only increase social spending, but also limit the potential for economic growth.
2. Youth unemployment
Youth unemployment has reached worrying levels, exceeding 21 percent in June 2023. Many university graduates cannot find adequate jobs because the labor market is not prepared for increasing academization. At the same time, there is a lack of appreciation for vocational training, which further exacerbates the structural problems in the labor market.
3. Housing crisis
China's real estate sector, which has long been a mainstay of the economy, is in deep crisis. Companies like Evergrande and Country Garden are struggling with over-indebtedness and bankruptcies. It is estimated that there are approximately 65 to 70 million vacant homes nationwide. This crisis has far-reaching consequences as many households have invested a significant portion of their assets in real estate.
4. Falling consumer spending
Despite the size of its economy, China's consumer spending is only about 53 percent of GDP - well below the global average of 72 percent. Uncertainty about the economic future and a lack of a social safety net are contributing to Chinese consumers becoming increasingly reluctant to spend.
5. Over-indebtedness and excess capacity
The growth model based on industrial production has led to significant overcapacity in sectors such as steel, electric vehicles and solar panels. Many companies are heavily dependent on government subsidies because the market cannot absorb the volumes produced.
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6. Tensions with the USA
Rising geopolitical tensions between China and the US have negatively impacted trade, technology and investment. The trade war and restrictions on technologies such as semiconductors are affecting China's economic development.
Government strategies
The Chinese government has taken various measures to address these challenges:
Employment promotion
To combat youth unemployment, the government has launched programs to help college graduates find jobs. These include tax incentives for businesses, internship programs and increasing public sector hiring. In addition, vocational training is promoted through targeted campaigns.
Stabilization of the real estate market
In the real estate sector, requirements for first-time buyers have been relaxed and mortgage rates have been reduced. In addition, the government has taken measures to complete unfinished housing projects to regain consumer confidence.
Trade diversification
Amid tensions with the US, China is actively seeking new trading partners and diversifying its supply chains. Regional trade agreements and partnerships with countries in Asia, Africa and Europe play a crucial role.
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Strengthening the private sector
The government is trying to strengthen the confidence of the private sector. High-level meetings with global business representatives are intended to make the business environment more attractive and attract investment.
Green transformation
China is increasingly relying on renewable energy and environmentally friendly technologies. This includes investments in solar and wind energy as well as the promotion of electric vehicles. The green economy is seen as the key to long-term stabilization and growth.
Comparison with other economies
A comparison with other economies shows that China continues to play a significant role in the global economy despite the current challenges:
China vs. USA
China contributes more to global economic growth than the United States. However, the per capita GDP in China remains significantly behind that of the USA.
China vs India
India is currently outperforming China in terms of economic growth. While India's annual growth is around 7 percent, it is expected to overtake China's pace in the medium term. However, India still has a long way to go to reach China's industrial and technological levels.
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What's ahead?
The Chinese economy is at a turning point. The challenges posed by demographic change, the housing crisis, youth unemployment and geopolitical tensions could affect growth in the long term. At the same time, the green transformation and the diversification of trade offer new opportunities for sustainable development.
The measures introduced by the Chinese government are showing initial results, but it remains to be seen whether these will be sufficient to fundamentally solve the structural problems. The development of China's economy will continue to be crucial not only for China itself but also for the global economy.
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