Andy Xie

Opinion | Without reforms, China can still afford the time to muddle through its economic problems

China won’t reach for harsh reforms, choosing instead to gently deflate its property bubble and absorb overcapacities as it waits for demand to return

This could take a long time but China has the luxury to dither: its manufacturing continues to gain in competitiveness and there is no real substitute for it

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Hot air balloons fly over residential buildings in Wuqing district of Tianjin, China on July 11, 2017. The biggest headwind for domestic demand is the deflation of the property bubble. Photo: Reuters

Andy Xie

Published: 6:15am, 9 Jul 2023

China’s post-Covid economic recovery has disappointed the market – but the expectations were unrealistic anyway. Its economy, which is absorbing a deflating property bubble and various overcapacities, needs time and structural reform to regain healthy growth.

But, unlike Japan, which also faced property bubble woes 30 years ago, China’s economy is still gaining in competitiveness, and so has time to fix its problems.

For now, the biggest headwind for domestic demand is the deflation of the property bubble. Construction has slowed as China finesses a gradual deflation. At the end of last year, the still-vast areas of residential real estate, office and commercial space being built had shrunk respectively by 7.2 per cent, 7.4 per cent and 12 per cent from the year before. At this pace, and given the property sector needs to shrink by at least half, there will be headwinds for the next five to six years.

What China should do, but will not do, is introduce structural reforms. Overinvestment and the resulting overcapacity have been the hallmarks of China’s economy for the past two decades, as local governments were motivated to attract investments to quickly boost GDP. This incentive structure lasted so long because China’s growing share of global trade helped to pare back its overcapacity.

Yet China remains competitive. A big part of its manufacturing has upgraded to 5G and artificial intelligence-assisted systems (though this, of course, exacerbates overcapacity). Its electric vehicle (EV) industry is rising rapidly. Its solar power is becoming cheaper than fossil fuel. And its nuclear power industry is about to take off.

China’s green transition is ahead of schedule and making a strong economic case for itself too. No other country can say that.