Now, it is difficult to overestimate the importance of China for the global economy. Over the past three decades, China has made an unimaginable economic leap, becoming the second largest economy in the world. Since 2009, China has been the main driver of global economic growth, accounting for 35% of nominal global GDP growth. Many economists even began to talk about the "economic miracle" of China. At least, this was the case before the onset of a difficult period for the whole world – the coronavirus pandemic.
Obviously, the COVID-19 pandemic has affected all countries, but it has hit the Chinese economy hardest, which is one of the last countries to lift quarantine restrictions. It was then that many points of "fragility" of the Chinese economy came to light: it became obvious that the growth of the Chinese economy all this time was mainly provided by investments in fixed assets, especially in the real estate sector, and financing was carried out through an inefficient and heavily regulated banking system. In the year of the pandemic, the real estate market began to "fall apart," making it seem that "China's hour of reckoning has come."
Although, thanks to government support, China's economy has "got back on its feet", showing sharp growth rates in the post-pandemic 2021-2022, economists' concerns about the "real" recovery of the country remain. In particular, in 2024, Nobel laureate economist Paul Krugman, in his column in The New York Times magazine, predicted the beginning of an era of "stagnation and disappointment" for China. The economist sees the root of the problem in the very original structure of the Chinese economy, where the forces of autocrats "stifle" private initiative. In his opinion, the collapse of the Chinese economy is expected and inevitable within the framework of the existing system of governance of the country.
The IMF economist E. Prasad, who in December 2023 published a work with the title "China's Bumpy Path", does not quite agree with this point of view. The author of the article notes that China, whose GDP by the end of 2022, taking into account the market exchange rate, reached 18.3 trillion US dollars or 73% of US GDP, managed to make such a leap, from the very beginning not possessing the characteristics that economists traditionally consider necessary for development. In particular, China still does not have a well-functioning financial system, strong institutions of a market economy, and a democratic and open governance system. But the absence of these factors did not prevent Chinese state from performing an "economic miracle".
E. Praed from the IMF is quite optimistic about the future of China. He notes that this year, China really has to deal with the challenges that have accumulated in their economy over the years, including:
Despite this, E. Prasad does not believe in the prospects of a deep crisis, since the accumulation of debt was financed by local savings. Also, as the author notes, the state owns the majority of creditors and debtors, which further reduces the risks of an escalation of the financial shock in the future. Country Garden and Evergrande Group are catalysts whose financial problems have revealed the problem of the entire construction industry in China. The author admits the chance that the problems of these developers will be transferred to their creditors, leading to a chain reaction of financial collapse. But here it must be borne in mind that most large Chinese banks are under the influence of the authorities, and they will not hesitate in the event of a serious threat to the financial system.
As a result, the author considers the economic state of China far from financial collapse although filled with risks.
E. Prasad is not alone in his relatively positive forecasts for China's financial sector. It should be noted that the picture outlined by the World Bank on the Chinese economy in December 2023 "converged" with the picture presented by Wei Zhang Shen, co-founder and executive chairman of one of the largest Asian investment funds PAG. It is interesting to compare both works, at least from the perspective of how economists of the Western world and economists of the East themselves see the future of the Chinese economy.
In general, the World Bank and Wei agreed on forecasts in many areas. First, they agree with each other that China will be able to avoid a deep crisis related to the housing sector. This conclusion is based on data demonstrating the resilience of the banking sector (partly due to the high share of government participation in it), and expectations of a simple flow of money from the real estate sector to the manufacturing sector.
In particular, Wei argues that the financial performance of the banking sector shows no signs of weakening: the share of non-performing loans is less than 1.6%, the capital reserve is about 15% (the legislation obliges to keep only 10.5%), the debts of developers are less than 6%, and the mortgage system is built on a “lifetime commitment”, which reduces the chance of non-repayment.
Similar theses are put forward by the World Bank, which also graphically described the stable position of the Chinese banking sector (Figure 14).
Amid the problems in the construction sector, the investment flow into China's industrial sector has increased significantly. According to the World Bank, over the past two years, investment in real estate has fallen by 18%, while investment in manufacturing industry has increased by 16%. Most of all, this is due to the growing global demand for electric cars, batteries, and other low-carbon technologies of local production. Also, it is worth considering government support, for which this industry is a priority, and the production of semiconductors, in particular. The World Bank provided a graphical representation of this phenomenon, with a specific division into sectors (Figure 5). On the graph, you can see a sharp decline in real estate investment, and significant investments in industry and infrastructure.
Thus, it is obvious that economists do not expect a financial crisis and collapse of China's real estate sector. But it's not that simple.
Despite the presence of common characteristics in the forecasts of IMF and WB, the work leads to fundamentally different conclusions. The World Bank study summarizes that in 2024 and 2025, China's economic growth rates will slow to 4.5 and 4.3, respectively. The conclusion about the future slowdown is associated with high debt levels, an aging population, and a persistent economic imbalance.
However, Dr. Shen 's research argues that the current slowdown in economic growth is only a medium-term phenomenon, and it may take a year or two before a full reboot and economic recovery. According to the author, the Chinese economy has significant potential for growth, which no other developed country has.
In general, given the high uncertainty in the world amid the aggravation of many geopolitical problems, it is difficult to predict in the medium term. But in the short term, economists agree that China will avoid the financial crisis and collapse of the real estate sector.
