By Syed Hussain
In the intricate mosaic of global economic relations, China's strategic decisions and internal economic challenges have become increasingly significant, influencing not only its domestic economic landscape but also exerting profound effects on the global stage. Among the myriad challenges it faces, the crisis within China's commercial property sector and the geopolitical tensions in the Red Sea stand out for their potential to impact both China and the broader international economy.
The commercial property sector in China, which once epitomised the country's rapid economic growth, has encountered severe turbulence. Marked by a glut of unsold inventory, plummeting property values, and burgeoning debt levels, the crisis is symbolised by the plight of property giant Evergrande, struggling under massive financial strain. This downturn results from a combination of speculative investment, over-expansion, and stringent regulatory measures aimed at reining in excessive borrowing. The repercussions are far-reaching, eroding household wealth, dampening consumer confidence, and posing significant systemic risks. The decline in property values, coupled with stalled construction projects, not only suppresses consumer spending but also threatens to introduce bad debts into the banking sector, potentially leading to tighter credit conditions and stifling economic growth.
On the international front, the tensions in the Red Sea, particularly around the strategically crucial Suez Canal, present a significant geopolitical challenge. This vital maritime route, essential for the global oil trade, has seen disruptions due to regional conflicts. This has directly affected China's energy security and the dynamics of the global oil market. Despite current oil price stability, the potential long-term effects of these disruptions could lead to significant shifts in global oil markets, affecting prices and supply security. China has strong interests in Red Sea security, with 60% of its Europe-bound exports passing through the Suez Canal in 2021. However, it has avoided involvement in America's military coalition responding to Houthi attacks on shipping, instead stressing solidarity with Arab countries. Though China could leverage its ties with Iran to help resolve the crisis, it seems unwilling to. Instead, China is valuing their relationship, causing them to lack sway over the Houthis. Moreover, China's state media blames the US for Middle East tensions. Under its "Global Security Initiative," China touts an alternative model prioritising economic cooperation over military solutions. But this vision has brought few concrete results, and China appears comfortable with the current threat level, routing some ships south while others continue northern passages. With limited influence and a desire to avoid deeper entanglement, China is unlikely to take an active mediation role despite its high stakes in Red Sea stability.
Moreover, the altered competitive dynamics between Russia and Saudi Arabia, key oil suppliers to China, could have implications for China's energy strategy and its international relations. As the world’s second-largest goods importer, accounting for close to 11% of global goods imports in 2022, China plays a pivotal role in international trade dynamics. Its imports from countries with high trade exposure to China, such as Mongolia, the Democratic Republic of the Congo, Vietnam, and Laos, underscore the interconnectedness of global economies with China's demand. Additionally, China's unwavering commitment to external lending, growing at an average annual rate of 12.3% since 2013, reflects a geopolitical strategy rather than purely commercial interests. Despite the wobbly economic recovery, China's leaders, including President Xi Jinping, have emphasized the importance of bolstering business confidence and lifting domestic demand, marking consumer demand as a top economic objective for 2023.
Addressing the crisis in the commercial property sector requires a careful recalibration of economic policies to stabilise the market and restore investor and consumer confidence. Concurrently, the crisis in the Red Sea necessitates strategic international positioning and a thorough reassessment of energy security strategies and supply chain resilience.
For the first time in decades, it appears that China's economic sprint is significantly slowing, a concerning development for a global economy that has long relied on China's nearly 1.5 billion population for broader growth. This slowdown has wide-ranging implications across political and security spheres, necessitating a comprehensive understanding of the potential ramifications for 2024. Among the critical challenges facing China is the alarming rise in youth unemployment, with recent data indicating a jobless rate of 21.3%. This trend, coupled with an increasing number of graduates returning to rural areas, underscores the difficulties in the job market, potentially leading to social unrest against a backdrop of China's complex history with student movements.
Additionally, the real estate sector, which constitutes about one-quarter of China's GDP, is in the throes of a severe crisis. The struggles of debt-laden giants like Evergrande and Country Garden, with $124.5 billion in defaulted bonds, raise fears of a financial system collapse and a broader economic downturn. This scenario is exacerbated by the real estate market's role in local government financing, risking a significant blow to public savings and local fundraising mechanisms. The potential for a Chinese economic downturn to trigger a global recession, given China's substantial share of global GDP and manufacturing, underscores the need for careful management to prevent an international contagion.
These challenges emerge as President Xi Jinping begins his third term, facing numerous domestic and international pressures. The geopolitical landscape, characterised by tensions with the United States and regional powers, alongside the ongoing war in Ukraine, presents a complex backdrop for China's economic and foreign policy strategies. The potential for an economic slowdown to influence China's stance on foreign policy offers a dual-edged sword, potentially leading to either a more cautious approach or more aggressive actions to advance national interests. China's economic outlook is further complicated by deflation and a shrinking population, with 2023 seeing the slowest growth since 1990. This slowdown, amidst weak private investment, modest consumer spending growth, and declining exports, alongside challenges such as youth unemployment hitting a high of 21.3% and a severe crisis in the real estate sector, showcases the complex interplay between domestic policies and global impact. The potential for a Chinese economic downturn to trigger a global recession, given China's substantial share of global GDP and manufacturing, underscores the need for careful management to prevent an international contagion.
The situation is summarised by rising trade protectionism and intensified geopolitical conflicts, as highlighted by Commerce Minister Wang Wentao, alongside the rapid growth of China's "new three" industries of electric vehicles, solar energy products, and lithium batteries, which, despite bolstering the economy, have sparked concerns among developed country trading partners over the potential for low-cost imports to disrupt local industries. This evolving economic landscape, coupled with China's demographic challenges, including a declining population and rising youth unemployment, necessitates innovative solutions to navigate the "new normal" of slower growth and structural changes. The international implications of China's economic strategies, particularly in sectors developed with heavy state subsidies, highlight a growing clash with the market-oriented capitalism of developed countries, raising questions about the future of global trade relations and the need for a balanced approach to industrial policy and international cooperation to address mutual concerns and avoid trade conflicts.
In conclusion, the combination of domestic economic challenges, including the commercial property sector crisis and geopolitical tensions, alongside the broader implications of a significant economic slowdown, underscores the complex interplay between China's domestic policies and its global impact. The global community remains vigilant, recognising that the unfolding situation in China will significantly influence economic trends and geopolitical alliances in the coming years. As China navigates these challenges, its strategic decisions will critically shape the future of the global economy, highlighting the importance of strategic insight and adaptability in managing the intricacies of international economic and political relations, making the unfolding situation in China a significant influence on economic trends and geopolitical alliances in the coming years.