Is China's Longstanding Growth Model Facing Distress after 40 Years?

China, the world's second-largest economy, currently finds itself in a state of deep distress. Wall Street Journal, a prominent American financial publication, has brought to light the downfall of China's once-thriving growth model, which had flourished over four decades. The Journal's comprehensive Sunday analysis delves into this issue, highlighting that the concerning signs extend beyond China's bleak economic statistics and permeate even the distant provinces.

A Shift to Slower Growth Era

Economists are now predicting that China is poised to enter an era characterized by notably sluggish growth. This outlook is further compounded by the challenges posed by unfavorable demographics and an ever-widening divide between China and the United States, along with its allied nations. These growing disparities present a significant threat to foreign investments and trade partnerships that have been integral to China's economic trajectory.

Impact on India's Economy: A Mixed Bag

The repercussions of China's economic slowdown and the ensuing specter of deflation are likely to cast a mixed impact on India's economy. On the one hand, the weakening Chinese economic landscape forecasts decreased demand for Indian exports. This, in turn, raises concerns about the potential negative effects on India's growth prospects. However, there's a contrasting effect as well – a devalued yuan would render Indian imports more cost-effective. This affordability could potentially stimulate heightened domestic consumption within India.

Beyond Economic Weakness: The End of an Era?

The gravity of the situation transcends the boundaries of a mere economic downturn. Observers and analysts are beginning to posit that what is unfolding could signify not just a temporary period of economic frailty but rather the gradual dimming of an era marked by prolonged prosperity. The financial daily strongly asserts, "Now the (economic) model is broken," signifying a significant paradigm shift currently underway.

Adam Tooze, a distinguished history professor specializing in economic crises at Columbia University, offers a profound perspective. He characterizes the ongoing situation as a dramatic gearshift in the annals of economic history. Tooze remarks, "We're witnessing a gearshift in what has been the most dramatic trajectory in economic history," as quoted by The Wall Street Journal.

Stark Debt Reality and Recognition

A comprehensive report serves to outline an alarming trend – China's total debt, spanning governmental and state-owned corporate sectors, has surged to nearly 300 percent of the nation's GDP as of the year 2022. This trajectory far surpasses even the debt levels recorded within the United States. This figure is a substantial escalation from the less than 200 percent recorded in 2012, according to data provided by the Bank for International Settlements.

Within the corridors of power in Beijing, senior officials have come to acknowledge that the growth model which had steered China's progress for decades has now reached its threshold. A noteworthy incident includes a pointed speech by none other than Chinese President Xi Jinping himself. Addressing a new generation of party leaders, he openly criticized the dependence on borrowing as a means to fuel construction and thereby expand economic activities. President Xi warned against the folly of clinging to outdated approaches, asserting, "You can't walk the old path with new shoes."

Policy Response for Economic Revival

Despite these acknowledgments, it appears that President Xi Jinping's administration has been slow to enact substantial shifts away from the longstanding growth model. The most recent statistics indicate that China's gross domestic product (GDP) experienced year-on-year growth of 5.5 percent in the first half of 2023. The National Bureau of Statistics (NBS) reported these figures in June. NBS data further reveals that China's GDP reached a remarkable 59.3 trillion yuan (equivalent to about 8.3 trillion US dollars) in the initial half of the year. The second quarter saw an even higher year-on-year GDP expansion of 6.3 percent, as reported by China's official media, which cited the NBS as the source.

Taking a proactive stance to rekindle economic momentum, China recently announced a reduction in its one-year loan prime rate (LPR) by ten basis points. This reduction brings the rate down from 3.55 percent to a new level of 3.45 percent. Notably, this move marks the second reduction of this kind within the current year. Meanwhile, the five-year rate remains static at 4.20 percent. These measures are a deliberate attempt to rejuvenate economic growth within China, the world's second-largest economy, following a trajectory reminiscent of the steps taken by the United States.