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THE BIG STORY
SHATTERED
DREAM
China’s missing economic
boom points to troubling
fundamentals
CK TAN, KENJI KAWASE and GRACE LI
Nikkei staff writers
DONGGUAN, China/HONG KONG “By rights, we
should be in a peak period,” said Michael Lu, founder
and president of premium gift box producer Brothersbox,
based in Dongguan, China. The period from May to
October is gift box season -- the lead-up to Christmas --
when Lu’s company usually makes most of its money.
However, this year, something strange has happened.
“Orders decelerated,” said the 51-year-old Lu, who
presides over a team of 240 workers and counts Disney
and Marks & Spencer among his customers. He is not
alone. Throughout Dongguan, a city in southern China
dubbed the “world’s factory” for its concentration of
export manufacturers, many are telling similar stories.
When China ended its COVID-19 controls late last
year, many economists expected a boom in consumption
fueled by pent-up demand. But while the country showed
some signs of recovery in the first quarter of this year,
growth has since been disrupted by a global economic
slowdown, tepid domestic demand and banks increasingly
vulnerable to the ailing real estate sector.
A string of weak economic data released recently is
further shaking confidence in China’s prospects. In July
consumer prices fell for the first time in two years, raising
the specter of deflation, while loan growth fell to its
A sales office for the Legend of Sea project,
co-developed by Country Garden Holdings
and Jiangsu Zhongnan Construction Industry
Group, sits abandoned in Ningbo, China,
on Aug. 16.
Nikkei Asia - Special excerpt from Sept. 4-10, 2023 Print edition. Nikkei Inc. No reproduction without permission.
lowest level since 2009. In mid-August the government
said it would no longer release age group-specific
unemployment data. This came after youth unemployment
hit a record 21.3% in June. The onslaught of bad news
has caused experts to question whether China’s economic
model, which delivered four decades of high growth,
could be falling apart.
“Local businesses in Dongguan are worried about the
future and cautious in their investment planning,” Lu said.
Brothersbox’s transformation from a printer of product
labels mirrored China’s rapid economic growth that began
in the early 1990s, fueled first by exports and later by the
rise of a consumer economy and domestic demand.
Like China as a whole, the 26-year-old company
has been facing headwinds since the second half of
2022 as demand from its major markets in the U.S. and
Europe has ebbed. Lu has since diversified to emerging
markets including Saudi Arabia and Venezuela. “As a
businessperson, we are the first to detect which way the
wind blows,” he said.
President Xi Jinping told the BRICS business forum
in South Africa on Aug. 22 that China’s economy
demonstrates “strong resilience, tremendous potential
and great vitality.”
Meanwhile, China’s government has launched a series
of measures aimed at boosting demand: China’s central
bank has cut interest rates twice this year while the
government has scrapped some limits on mortgages and
unveiled 31 guidelines to support the private sector.
Even so, there are clear limits on the government’s
ability to turn the economy around: Bad loans to property
developers threaten to put pressure on the banking
system, and debt-laden local governments do not have
the fiscal room to increase spending. The debt overhang is
also threatening China Evergrande Group, Country Garden
Holdings and other big developers as well as Zhongrong
Trust, which is one of the country’s biggest investment
trusts and recently missed payments to investors.
Carlos Casanova, Hong Kong-based senior Asia
economist at Union Bancaire Privee, is among several
economists who recently downgraded China’s economic
growth forecast. He predicts 4.8% gross domestic product
growth this year and a further deceleration to 4.5% in
 THE BIG STORY

Chinese President Xi Jinping, center, attends the The boom that wasn’t
China-Africa Leaders’ Roundtable Dialogue with South
The rapid growth expected after China lifted its COVID-19 controls has not materialized
African President Cyril Ramaphosa, second from left, (Growth rate, percentage change from a year earlier; quarterly basis)
in Johannesburg, South Africa, on Aug. 24.
GDP Rail freight Electricity consumption
30

confronting now will get worse rather than better,” Roach said. 20
Now, Roach noted, China is beset by a “very difficult set of
macro conditions” that are likely to defy the usual prescription 10
of “aggressive monetary and fiscal policies.”
Naoto Saito, head of research at Daiwa Institute of 0

Reuters
Research, believes China is getting close to its own “lost two
decades,” a reference to the prolonged period of depressed –10
2018 ‘19 ‘20 ‘21 ‘22 ‘23 2018 ‘19 ‘20 ‘21 ‘22 ‘23 2018 ‘19 ‘20 ‘21 ‘22 ‘23
growth experienced by Japan since the 1990s. Japan’s
Source: National Bureau of Statistics of China, China State Railway Group, China Electricity Council
stagnation was at least partly triggered by a real estate market
2024. China’s official projection, released in March, for GDP collapse creating a banking crisis -- conditions that could be
growth this year is around 5%. taking hold in China today.
“We are looking at significantly slower growth for China in Saito, a veteran China economist, said the way to avoid THE ‘LI KEQIANG INDEX’ Getting be- Comparing new lending with new
the future, definitely below 5%.” Casanova said, adding that slipping into “Japanification” is to “allow private enterprises to yond the official statistics is a key prereq- savings, however, shows that the gap be-
he sees this as a “long-term structural trend.” thrive.” uisite to understanding China’s economy. tween these is increasing, as the growth
Other China watchers are also pointing to a major shift in Beijing “really needs to prioritize the private sector in a Former Premier Li Keqiang famously did of new savings outstrips the growth of
the trajectory of the economy, which is dousing Beijing’s hopes straightforward way,” as that is the main source of growth and not trust GDP figures, telling the U.S. new lending. The last time this hap-
of joining the exclusive club of technologically advanced, high employment for the country, he said. ambassador in 2007 that pened was during the crisis year of
per capita income countries in coming years. Lu of Brothersbox also feels the issue is deep-rooted. China’s GDP num- 2015, when the Shanghai Stock
Stephen Roach, a senior fellow at the Paul Tsai China Center “From the perspective of macroeconomics and international bers were “man- Exchange fell by more than

Reuters
of Yale Law School, told Nikkei Asia that he does not see a relations,” he said, “I don’t think this is a short-term [trend]. made,” accord- 40% in a matter of weeks
“Lehman moment-type crisis” in China at present, as China has Under circumstances including the China-U.S. trade war and ing to a leaked over the summer.
a substantial amount of domestic savings and foreign reserves decoupling, China’s growth trend will be unlikely to return to diplomatic Midway through 2023,
and limited exposure to short-term foreign capital, enabling it what it was before.” cable. Li used with that boom still non-
to avoid a meltdown and global contagion. But “China is [at] a In this article, Nikkei Asia has gathered some of the most three proxies -- existent, China’s companies A bank clerk counts 100-yuan bank notes
in Beijing. New bank loans in July grew
pivotal point in its economic development,” he said. representative recent data on China’s economy and put it electricity consump- and consumers appear to be at the slowest pace in 14 years, but whether
A reluctance to introduce large stimulus measures, unlike in the to a range of experts in an effort to better understand the tion, rail cargo volume in crisis mode, preferring to this is representative of a downward trend
past, suggests Beijing might sense that the “problems they are implications for China and the world. and the value of bank loans. save rather than borrow anew. is difficult to know.
Ever since, these have become
important gauges in measuring real
economic momentum.
China’s economic slowdown Loan data suggests loss of confidence
They now tell a slightly more pessimistic
GDP growth rate has been falling for over a decade (In percent, quarterly basis) Recent years have seen Chinese save more and spend less
story than China’s GDP, which expanded (For yuan-denominated loans and deposits, in trillions of yuan)
20 by 6.3% year on year during the quar-
New loans (Monthly basis) Difference between deposits and loans
ter ended in June. Power consumption
increased 6.6% during that quarter, rail 5 50
freight dropped 2.1% during the same pe-
10 4 40
riod and new bank loans in July grew at
their slowest pace in 14 years. 3 30
Bank loans, however, are difficult to
0 judge. As the table to the right shows, the 2 20
numbers for new lending are extremely
1 10
volatile, and while the July figure for new
–10 lending was indeed the lowest recorded 0 0
1993 ’95 2000 ’05 ’10 ’15 ’20 ’23 since 2009, it is not clear that this rep- 2009 ‘11 ‘13 ‘15 ‘17 ‘19 ‘21 ‘23 2013 ‘15 ‘17 ‘19 ‘21 ‘23*
Source: National Bureau of Statistics of China resents a downward trend. *Through July 31 Source: The People’s Bank of China

Nikkei Asia - Special excerpt from Sept. 4-10, 2023 Print edition. Nikkei Inc. No reproduction without permission.
 THE BIG STORY

Trading down LOCAL LIMITS ON SPENDING Mount- Pressure on local governments

China’s exports boomed during the pandemic, but have faltered this year ing local government debt, long a major Many of China’s provinces are under severe strain from low revenues and high debt
(Dollar-denominated trade, percentage change from a year earlier; monthly basis) risk factor, became even more conspicuous (Outstanding debt of local governments, in trillions of yuan)

160 over the past few years as China’s property 40

crisis deepened. Back in 1994, a tax reform
120 shifted a significant amount of tax revenue 30
from local governments to Beijing, while a
80
large portion of expenditures were left to
20
40
local governments.
The key revenue source for local gov-
10
0 ernments since then has been land rights
Import
Export sales and other property-related income.
–40 When the real estate sector was thriving 0
2018 ‘19 ‘20 ‘21 ‘22 ‘23 2019 ‘20 ‘21 ‘22 ‘23

Reuters
and land prices rising in the late 1990s,
Source: General Administration of Customs of China Source: China Electronic Local Government Bond Market Access
there was no trouble. But developers
have since lost the financial strength to
purchase new land rights, and many
GLOBAL SLOWDOWN China’s exter- exceeded expectations due to subdued de- The Yangshan Deep-Water Port local government coffers were hit hard in cles,” said Lan Wang, an analyst at Fitch
nal trade, in particular exports, posted mand from major trading partners in the in Shanghai: China’s July imports 2021, just as COVID-19-related expendi- Ratings, referring to local investment
robust growth of more than 20% almost European Union., U.S. and Southeast Asia. contracted by 12.4%, driven tures were adding to their burden. Local companies that borrow to finance de-
by declines in commodities
every month in 2021, when many coun- Imports contracted by 12.4%, driven by and semiconductor products.
governments’ revenue from sales of land- velopment projects. Wang said a central
tries were struggling through lockdowns, declines in commodities and use rights from January to July this year government bailout of troubled LGFVs
and consumer spending was fueled in semiconductor products. was 2.29 trillion yuan ($314 billion), 19% is “unlikely.”
part by pandemic relief money. “Externally, a grim point,” said Louise Loo, lead economist at down from last year and 45% down from
But China’s trade outlook across key U.K. research company Oxford Economics. 2021 for the same period, according to the
growth has begun to falter developed markets, In the medium term, the Chinese econ- Ministry of Finance. Lockdowns and infection
since the second half of which account for omy will be slowed by uncertain export Local government debt has now be- prevention measures enacted
2022 due to uncertain- about one-third of growth from rising labor costs vis-a-vis come a risk to the banking system, and during the COVID-19 pandemic,
ties in global and China’s goods ex- other emerging markets and the geopolit- a constraint on authorities’ ability to in- like this disinfection protocol
seen in Shanghai in April 2022,
domestic markets. ports, implies that ical rivalry with U.S.-led developed econ- crease spending to boost the economy. stretched China’s local

Reuters
In July, the decline Chinese trade figures omies, among the other structural issues, “Refinancing risk remains high among governments, which were
in exports (14.5%) may continue to disap- said Moody’s Investors Service. weaker local government financing vehi- already struggling with debt.

GETTING PRICES RIGHT While the rest largest producer and consumer of pork,

Getty Images
Flirting with deflation
of the world fights inflation, China has and the meat is the biggest driver of CPI
China’s consumer price growth has been edging downward, driven by gyrations in producer prices
(Consumer price index and producer price index, percentage change from a year earlier; monthly basis)
quite a different preoccupation: falling fluctuations.
prices. It was the sharper fall in producer prices
15
The buildup of deflationary pressures -- which contracted by 5.4% in June, the
in China in recent months has raised con- steepest fall since December 2015 -- that
10
cerns over the risk of economic stagnation, caused greater alarm.
similar to what Japan experienced starting The weakening of these prices reflected
5
Non-food in the 1990s. lower commodity prices and China’s in-
CPI In China, the consumer price index for dustrial overcapacity, a constant prob-
0
CPI July contracted for the first time in over lem for the country and arguably a main People shop at Xingkang
PPI two years. factor that led Xi to propose his Belt and Comprehensive Market
–5
But anxiety was mitigated by the fact Road Initiative (BRI), a grand plan for in Huzhou city in China’s
Zhejiang province in
–10 that the main reason the CPI dipped into global infrastructure projects that to- August. Consumer prices
2013 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 negative territory was a 26% year-on-year gether would create new trade routes in China dropped in July for
Source: National Bureau of Statistics of China, QUICK-FactSet drop in pork prices. China is the world’s from China. the first time in two years.

Nikkei Asia - Special excerpt from Sept. 4-10, 2023 Print edition. Nikkei Inc. No reproduction without permission.
 THE BIG STORY

A DEMOGRAPHIC DEBACLE China, Productivity problems

Workers leave a Country
which starting in the 1990s enjoyed a China’s labor productivity growth is slowing (Percentage change from a year earlier)
Garden residential building
construction site in Tianjin, “demographic dividend” of cheap labor 15
China, on Aug. 18. fueling rapid growth, is now struggling
to sustain productivity. The working-age 10
population started dwindling in 2015, and
the overall population began to decline 5
last year. This has become a key constraint
on future growth. 0
1992 ’95 2000 ’05 ’10 ’15 ’20 ’22
If there are fewer people working, and
they are less and less productive, it is hard Source: CEIC

to see how China can continue to grow

over the long term. Unless the government
THE WEAK LINK China’s banks are at accelerates structural reforms, economists
the center of attention as the country’s say, President Xi’s target of doubling eco-
property woes spread. They are facing nomic capacity by 2035 is unrealistic.
China’s working age population is set to fall steeply over the next 15 years
(Estimated number of people, in millions)
Reaching retirement age of 60 Reaching working age of 16
30

Reuters
shrinking net interest margins (NIM), a Introducing changes that could help 20
key measure of bank profitability, as the counteract the decline in labor produc-
central bank lowers interest rates to stim- tivity, however, is a tall order for the gov-
Banks under pressure 10
ulate the economy. A lower NIM would Recent years have seen nonperforming loans in China rise while net interest margins fall
ernment. “Technology development and a
mean lower core capital for banks, making (Quarterly basis) wide application of advanced machinery,
it harder for them to lend to businesses, together with an improvement in the social 0
Nonperforming loans Average net interest margin of 2013 ‘16 ‘18 ‘20 ‘22 ‘24 ‘26 ‘28 ‘30 ‘32 ‘34 ‘36 ‘38
said Allen Feng, associate director for (In billions of dollars) commercial banks (In percent) safety net and pension system” would help,
Source: National Bureau of Statistics of China, Nikkei Asia research
China markets at consultancy Rhodium. Moody’s Investors Service said in August.
500 3
Aninda Mitra, head of Asia macroeco-
nomics and investment strategy at BNY 400
Mellon Investment Management, echoed 2
that sentiment. While Chinese banks 300 JAPANIFICATION? The specter of

AP
do not face liquidity worries like some Japan’s “lost decades” now looms.
property developers and LGFVs do, li- 200 Saito of the Daiwa Institute of Research
1
quidity does not necessarily translate into believes it is “inevitable” that China will
100
more lending. enter Japan-like, long-term stagnation due
With housing prices falling and several 0 0 to the demographic pressures of an aging
A nurse takes care
developers in financial distress, banks’ ex- 2011 ‘13 ‘15 ‘17 ‘19 ‘21 ‘23 2011 ‘13 ‘15 ‘17 ‘19 ‘21 ‘23 and shrinking population, a real estate- of a newborn baby
posure to the housing market could pre- Source: CEIC, Wind Information reliant economic growth model, excessive in a maternity hospital
vent them from lending more to stimulate investment, swelling debts and an over- in Fuyang, Anhui province,
China’s house prices are falling Bank returns still healthy but reliance on state-owned enterprises. on Jan. 17. A population
the economy, something the government (Newly-built house prices, percentage change creeping downward that has crested and
would like to see. from a year earlier; monthly basis) (China’s commercial banking sector return on While Roach of the Paul Tsai China
is gradually beginning
Stevan Tam, a Hong Kong-based re- equity after tax, in percent) Center does not make a direct connection to shrink will pose new
search director at Fulbright Securities, told 15 25 between present-day China and Japan, he challenges for China’s
Nikkei: “As [the] economy keeps wors- finds certain similarities, mainly low pro- leaders.
ening, while property developers’ credit 20 ductivity stemming from demographic
10
default risk arises, banks [will] have no pressures.
choice but to tighten their loan business.” 15 An “aging society needs a lot of struc- ence of China today in the global economy ing its neighbor’s battle with demographic
It remains to be seen how widespread the 5 tural reform to boost [the] growth rate,” he and trade is larger than Japan’s was in the decline, wrote Shirakawa. “Ultimately, it
risks are to banks from the troubles of de- 10 said, but “I am afraid China will even have late 1990s,” he wrote in a recent article for will be a matter of how China copes with
veloper Country Garden, which recently 0 a tougher time doing that” than Japan. Nikkei Asia. the bursting of its bubble.”
5
missed a coupon payment on two dollar- Masaaki Shirakawa, former governor of But there could also be upsides to
denominated bonds. “If Country Garden the Bank of Japan, agrees that the stakes the parallels with pre-stagnation Japan.
–5 0
goes bankrupt,” Tam said, “another wave 2016 ’17 ’18 ’19 ’20 ’21 ’22 ’23 2005 ’10 ’15 ’20 are high. “China is in a disadvantageous “[China] can learn from Japan’s experience Additional reporting by Echo Wong in Hong
of bad debt writing off is foreseen.” Source: Refinitiv Source: World Bank Global Financial Development position because of its sheer size. The pres- and take preemptive measures” by study- Kong and Mitsuru Obe In Tokyo.

Nikkei Asia - Special excerpt from Sept. 4-10, 2023 Print edition. Nikkei Inc. No reproduction without permission.