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Mint Explainer: China’s economy struggles to find a foothold

There have been doubts about China’s nascent economic recovery after a series of data points suggested that the world’s second-largest economy is struggling on several fronts. Industrial production numbers missed estimates by a wide margin even as youth unemployment remained a concern. Mint explains why optimism about China’s recovery has fallen.

The Chinese economy showed signs of promise after the country dismantled its strict covid restrictions earlier this year as the world’s second-largest economy recorded 4.5% GDP growth during the first three months of 2023. Amidst gloomy economic forecasts in much of the developed world, China’s recovery was an encouraging sign.

However, optimism on China has been dented as key data points suggest that the country’s recovery is faltering. Industrial production grew 5.6% year-on-year in April, missing forecasts by a wide margin.

Meanwhile, manufacturing activity shrank for a second straight month in May, according to data released on Wednesday. Industrial profit levels have also been low.

These troubles have been compounded by larger issues such as a weak property market and high youth unemployment, which crossed 20% in April. China’s young, it seems, are feeling the brunt of the country’s economic slowdown. The government’s crackdown on sectors such as finance, real estate, technology and consumer-facing startups has hurt young job-seekers.

The real-estate sector, which has played a key role in powering the country’s economic rise, remains dazed and disoriented after a rollercoaster year that saw furious citizens refusing to pay their mortgages. This, and a brush with the country’s regulators, has damaged confidence in the sector. According to research firm Gavekal, home sales fell 63% from 2019 levels.

These worrying signs come after policymakers set a modest 5% growth target for 2023. The economy grew by just 3% in 2022. But confidence among consumers and the private sector seems to have taken a hit, which does not bode well for the economy.

Markets have taken note of the country’s weak economic performance. According to some estimates, stocks of Chinese companies have dropped by a total of $540 billion since mid-April. The yuan has also faced downward pressure.

This has led to widespread expectations that the government will deliver a stimulus package to boost growth and tackle rising discontent. Numerous China analysts have observed that citizens have an unspoken social contract with the ruling Chinese Communist Party – economic growth and rising living standards in exchange for not challenging the CCP’s authoritarian rule.

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Updated: 31 May 2023, 01:48 PM IST

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