CHINA, ONCE considered a global economic superpower, is startling national leaders and international investors with its recent economic slowdown. The country’s stock market index has fallen over 20% from its January peak, consumer prices are plummeting, and real estate crises are deepening[1]. With such a mix of factors, China’s economic growth miracle is starting to get overshadowed by fiscal challenges. 

The status quo of China’s economy 

   Recently, China has been experiencing a major economic crisis, with the Yuan hitting a 16-year low. In spite of Beijing’s recent efforts to shore up confidence in the economy, investors are still rushing for the exit as the country’s stock market lost over $6 trillion in value in just three years[1]. The International Monetary Fund (IMF) anticipates China’s gross domestic product growth to be 4.6% this year compared to 5.2% in 2023— one of the weakest performances in decades. Even worse, a further decline to further decline to around 3.5% is expected in 2028[1]

   The second-largest economy in the world is grappling with a number of challenges in aspects not just financial, including a record downturn in its dominant real estate market, high youth unemployment, deflation, and a falling birth rate. In particular, youth unemployment has gotten so severe that the government has halted the publishing of relevant data altogether[1]. Due to the aforementioned challenges, China is suffering from falling consumer prices, skyrocketing defaults, and decreased exports. This economic woe is leaving the world to question the permanency of China’s current status as a global superpower, since the country's current troubles are expected to persist in the long run, to the detriment of both itself and neighboring countries. 

China’s real-estate crisis

   China’s economic situation has been exacerbated this month following defaults by Country Garden, the country’s largest developer by proper sales, and Zhongrong Trust, a prominent trust company that managed $87 billion worth of funds for corporate clients[2]. Such economic woes began with the debt defaults of Evergrande, one of China’s largest Chinese property developers, that signaled the start of a real estate crisis. Evergrande has come to symbolize the upheavals of China’s property boom and busts that spooked investors on China’s economic uncertainty and falling industries. While Evergrande is still undergoing a debt restructuring, the defaults of Country Garden are raising fresh concerns about the real estate market in China[3]. 

   To mitigate the crisis, Beijing has implemented a series of supportive measures to revive the real estate market by introducing new sets of economic stimulus measures that involve cuts to down payment ratios and the extensions of mortgage repayment deadlines. These measures were implemented to enable more individuals and families to enter the market and purchase homes while stimulating investment activities[4]. With increased accessibility to homeownership, consumers may obtain more disposable income to spend in the market. However, despite such efforts to boost demand, the housing market still remains stagnant and the strongest players of China are nonetheless at the brink of default, illustrating how the country still has waves of crisis that are yet to be faced. 

Local government debt

   Another critical fiscal challenge of China is its local government debt. Such debt has soared largely due to plunging land sale revenues caused by the real estate crisis and the Corona Virus Disease (COVID) pandemic lockdowns. The piling local government debt not only poses significant risks to Chinese banks but to the government's ability to spark growth and expand public services. This then causes a negative cycle where lowered expectations of future security among residents leads to diminished consumption and investment. This cycle of economic distrust and decline exacerbates China’s economic crisis. Economic stress caused by deeply rooted issues is highly worrisome for long-term economic growth and social stability.

   The issue becomes magnified when considering China’s status as the world’s most decentralized nation in terms of subnational spending. According to the IMF, 85% of budgetary spending is managed by China’s local governments, bearing significant fiscal duties in areas like pensions, medical care, and unemployment insurance[5]. Such a characteristic is now causing waves of troubles, as many regional bodies are burdened with rapid expenditure growth due to aging and urbanization. 

   The Chinese government has made desperate efforts to boost local economies by cutting interest rates and unleashing more long-term cash alongside to bring back the consumer business and the property market. However, these efforts have turned out to be futile, as China has simply become too indebted from its economic losses to revitalize the economy like it did in the 2008 global financial crisis, once again discouraging hopes for an economic comeback[2].

Chinese influence on Korea and future prospects

   China is currently drowning in high domestic debt levels, a falling property market, and a shrinking labor force. The country’s worsening real estate crisis is raising voices of concern in Korea as there are predictions that it would cause economic downturns in Korea by reducing exports, increasing exchange rates, and worsening financial market volatility[6]. The reduced export can especially be critically damaging as South Korea’s economy is highly dependent on exports, while heightened market volatility can deter domestic and international investors which can lead to capital outflows. 

   On the contrary, there are assessments suggesting the Chinese impact on Korea’s economy will thankfully be limited. Firstly, China’s real estate crisis at the moment is still considered to be a domestic issue that is not severe enough to destabilize the Korean market. The linkage between China and the global financial market did in fact increase significantly over the past 15 years. Yet, the linkage still remains limited as the Chinese government maintains substantial control over the capital flow, restricting capitalist market investment[6]. Secondly, the Chinese government has shown a remarkable ability in handling major economic and financial pressures built up from its highly inefficient and risky growth model. At various points, the government still managed to navigate the economy around the seemingly inevitable prospects like currency devaluation, banking crises, and a housing market meltdown in the 2008 financial crisis. If the government adequately resolves potential policy dilemmas regarding debt management and ways to encourage private sector innovation, the country may steadily recover[7].

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   China currently faces a significant economic downturn that threatens its reputation as a global superpower. The real estate crisis, piling local government debt, and unemployment are accused of being the main drivers of the slowdown. Consequently, China is now juggling a series of even more issues such as high domestic debt levels, decreased exports, and falling consumer prices. Although such challenges may persist in the long run, there still remains a likelihood that China’s economy rebounds and continues to reliably support the global market.

[1] Hang Seng Index 

[2] CNN

[3] BBC

[4] South China Morning Post

[5] East Asia Forum 

[6] Joong-ang Il-bo

[7] Korea International Trade Association