Steep losses for the stock market and a slump in FDI to the lowest level in decades has brought added urgency to efforts by officials in Beijing to shore up confidence that the CCP regime is prepared to take the steps required to stabilize an economy that has shown signs of wobbling amid mounting difficulties for the crucial property sector.

That the government possesses the wherewithal to at least temporarily stave off a crisis is not in dispute. However, a long-term fix for the problems ailing the economy will require more than tinkering around the edges, and any aggressive fiscal stimulus measures and moves to bolster defenses against a debt crisis will only delay a reckoning unless accompanied by significant structural reforms.

It is far from clear that President Xi Jinping is prepared to use his enhanced authority to push through the necessary reforms against strong resistance from vested interests, including local government administrators and managers of state-owned enterprises.

Hopes that the CCP’s eagerly awaited Third Plenum, a party meeting held every five years to set the medium-term economic strategy, might produce reassuring confirmation of a commitment to deeper restructuring were mostly disappointed. The communique released at the close of the gathering affirmed the now familiar aims of striking a healthy balance between state regulation and market mechanisms and creating room for the expansion of private activity alongside a significant state sector. Missing from the statement was any acknowledgment, however implicit, that Xi’s prioritization of national security and bolstering the CCP’s political control is one of the key reasons that the development agenda has fallen short of the goals enunciated more than a decade ago at the start of Xi’s presidency.

Economic risks appear to be contained for the time being. Real GDP growth rebounded to more than 5% last year, and warnings that China faced a protracted period of deflation and stagnation been silenced at least temporarily by the return of inflation in 2024. However, there is no sign of an imminent resumption of the 6%-7% growth rates of the pre-pandemic period and a very high savings rate for households is indicative of widespread perceived economic insecurity. The negative sentiment is no doubt reinforced by the elevated youth unemployment rate, which stood at 14.9% in late 2023 (after a change to the calculation method that lowered the number from 21.3% at mid-year) and moved above 17% in July 2024.

Even if the more dire predictions for the economy turn out to overblown, an increase in protests fueled by economic grievances over the past year is creating pressure on local authorities to choose between suppression or concessions that are not infrequently at odds with directives from Beijing. Increased local unrest represents a double risk in that it heightens the danger of non-execution of potentially sound national policies and creates an incentive for mid-level administrators to obscure the negative effects of bad decisions made by the center for fear of inviting the wrath of superiors within the party structure.

The economy registered real GDP growth of 5.3% (year-on-year) in the first quarter of 2024, matching last year’s average rate, but the pace of expansion slowed to 4.7% in the April-June 2024, largely reflecting the weakness of domestic demand against the backdrop of worsening conditions in the property market and constrained local government finances. On balance, the chances of sustaining real GDP growth of even 5% in 2024 likely hinge on a significant increase in the positive contribution from investment. It is debatable whether the recent moves to loosen fiscal and monetary constraints are sufficient to produce that result.

The analysis above is taken from the August 2024 Political Risk Letter (PRL). The best-in-class monthly newsletter, written by the PRS Group, provides concise, easy-to-digest briefs on up to 10 countries, with additional recaps updating prior month’s reports. Each month’s Political and Economic Forecasts Table covers 100 countries, with 18-month and five-year forecasts for KPIs such as turmoil, financial transfer and export market risk. It also includes country rating changes, providing an excellent method of tracking ratings and risk for the countries where credit professionals do business. FCIB and NACM members receive a 10% discount on PRS Country Reports and the PRL by subscribing through FCIB.