The crisis of confidence is sweeping the Chinese economy

Earlier this year, David Yang was confident about the prospects for his perfume factory in eastern China.

After nearly three years of lockdowns crippled by the coronavirus, China lifted its restrictions in late 2022. The economy seemed destined for a comeback. Mr. Yang and his two business partners invested more than $60,000 in March to expand production capacity at the factory, anticipating a surge of growth.

But the new work never materialised. Actually, it’s worse. He said people are not spending, and requests are a third of what they were five years ago.

“It’s frustrating,” said Mr. Yang. “The economy is going downhill at the moment.”

For most of the past four decades, the Chinese economy has seemed like an unstoppable force, the engine behind the country’s rise to global superpower. But the economy is now experiencing a series of crises. The real estate crisis created by years of overbuilding and excessive borrowing goes hand in hand with a larger debt crisis, while young people suffer from record unemployment. Amid the bad economic news, a new crisis is emerging: the crisis of confidence.

The growing lack of confidence in the future of the Chinese economy borders on despair. Consumers are reluctant to spend. Companies are reluctant to invest and create jobs. Also, potential entrepreneurs do not start new businesses.

“Low confidence is a major problem in the Chinese economy right now,” said Larry Hu, chief China economist at Macquarie Group, an Australian financial services company.

Mr Hu said the erosion of trust was feeding a self-feeding downward spiral. Chinese consumers don’t spend because they worry about jobs, while companies cut costs and are reluctant to hire because consumers don’t.

In the past few weeks, investors have withdrawn more than $10 billion from the Chinese stock markets. China’s top securities regulator on Thursday summoned executives at the country’s national pension funds, major banks and insurance companies to pressure them to invest more in Chinese stocks, Reuters reported. CaixinEconomic magazine. Last week, shares in Hong Kong plunged into a bear market, down more than 20 percent from their January high.

From its resilience to the challenges of the past, China has built a deep belief in its economy and state-controlled model. It rebounded quickly in 2009 from the global financial meltdown, and in spectacular fashion. It survived the Trump administration’s trade war and proved indispensable. When the epidemic swept the rest of the world, the Chinese economy rebounded vigorously. The Global Times, the mouthpiece of the Chinese Communist Party, declared in 2022 that China was “Unstoppable miracle“.

One factor contributing to the current confidence deficit is the possibility that China’s policymakers have fewer good options to combat the decline than in the past.

In 2018, with the economy locked in a trade war with the United States and the stock market slumped, Xi Jinping, the Chinese leader, gave exciting speech.

Mr. Xi was addressing an international trade fair in Shanghai and sought to quell the uncertainty: No one, he said, should ever waver in confidence in the Chinese economy, despite some ups and downs.

“The Chinese economy is not a pond, but an ocean,” Mr. Xi said. “The ocean may be calm in its days, but strong winds and storms are expected. Without them, the ocean will not be the same. Strong winds and storms may shake a pond, but never the ocean. When you talk about the future of the Chinese economy, you have every reason to confident.

But in recent months, Xi has said little about the economy.

And unlike previous crises, which were international in nature, China faces a set of long-standing domestic problems – some of them the result of the policy changes implemented by Mr. Xi Jinping’s government.

After the 2008 financial crisis, China launched a massive stimulus package to get the economy moving again. In 2015, when the real estate market was teetering, Beijing handed out cash to consumers to replace run-down shacks with new apartments as part of an urban redevelopment plan that sparked another building boom in smaller Chinese cities.

Now policymakers face a very different landscape, forcing them to rethink the usual rules of the game. Local governments and businesses are saddled with more debt and less room to borrow heavily and spend freely. After decades of infrastructure investments, there is no longer much need for another airport or bridge, the kind of big project that would stimulate the economy.

China’s policymakers are also in shackles because they introduced many measures that precipitated the economic problems. “Zero Covid” lockdowns have brought the economy to a standstill. The real estate market is suffering from measures taken by the government three years ago to curb heavy borrowing by developers, while security crackdowns on the fast-growing technology industry have prompted many technology companies to reduce their ambitions and the size of their workforce.

When China’s top leaders met in July to discuss the rapidly deteriorating economy, they did not offer the bazooka-style spending program that some had expected. After the meeting ended, the CPC Politburo presented a long list of pronouncements — many of which were paraphrased from previous pronouncements — without any new announcements. However, the report focused on the need to “boost confidence”, without providing details of what measures showed policymakers’ willingness to do so.

“Whether you have confidence in the Chinese economy is actually whether you have confidence in the Chinese government,” said Kim Yuan, who lost his job in the home decoration industry last year. He is struggling to find another job, but said the economy is unlikely to deteriorate significantly as long as the government remains in control.

Faced with declining confidence, the government has returned to a familiar pattern and stopped announcing worrying economic data.

And this month, China’s National Bureau of Statistics said it would stop publishing youth unemployment figures, a closely watched indicator of the country’s economic woes. And after six consecutive months of high unemployment among people aged 16 to 24 in the country, the agency said the collection of these figures needed “further refinement and improvement”.

The bureau also this year stopped issuing consumer confidence surveys, which are among the best measures of households’ willingness to spend. Confidence rebounded modestly at the beginning of the year, but began to decline in the spring. The government statistics office last announced survey results for the month of April, breaking a streak it began 33 years ago.

Rather than giving people less to worry about, the sudden removal of closely watched data left some on Chinese social media wondering what they might be missing out on.

Lawrence Pan, 27, noticed something started to go awry in 2018 when clients at the international advertising agency in Beijing, where he worked, began cutting their budgets. Over the next few years he would bounce from agency to agency, but the wariness of clients about spending was the same.

He quit his last employer three months ago. Mr. Ban said he got new jobs quickly in the past, but was struggling to find one this time around. He has applied for nearly 30 jobs since last month and has not received an offer. He said he was considering working part-time at a convenience store or fast-food restaurant to make ends meet. With so many uncertainties, he has cut back on his spending.

“Everyone is going through hard times now, and they don’t have money to spend,” he added. “This might be the hardest time I’ve ever been through.”