Hey China! Where Did All That Growth Go?

January 20th, 2025

Max Guo

Earlier last year, China’s government claimed that it had reached its goal of 5% growth in the country’s GDP. Few Chinese believe it. China’s economy is still facing mild deflation, a sign even worse than rampant inflation. Everyone knows that the problem stems from weak consumer spending, an imploding housing market, and a lack of foreign direct investment (FDI.) Optimists say that China took too long to pump cash into the economy, but now that the country recently pumped 6 trillion yuan ($840 billion) into the economy (to help local governments pay back their mountains of debt, but we can ignore that fact!), the country will rebound! And it’s about time! Some estimates predicted that China’s GDP could have surpassed America this year, or at least within the decade. Instead, it has fallen as a share of America’s GDP from its peak during the months before the COVID-19 pandemic.

Unfortunately, the superficial signals obscure institutional problems with China’s economic system, stemming from Xi Jinping’s heavy-handed rule, which often precludes strong growth in favor of state control. Let’s begin with one of the most obvious signs of decline: the housing market. Over the past few years, one of China’s largest sectors, real estate, collapsed, wiping away the wealth of millions of Chinese. 70% of all Chinese wealth is tied up in real estate, including a large amount of my relatives’ money back in China. They, their friends, and their neighbors lost significant sums of money during the real estate crash. Though nobody dares to say it, it’s clear that the government was responsible. In 2020, Xi Jinping, looking out over his country and seeing the rapidly rising cost of homes, suddenly concluded that homes were too expensive. So, he decided to implement rent control, as well as to curtail the sale of land to real estate companies. “Houses are for living in, not for speculation,” he decreed. The problem was that this brute force method didn’t take into consideration how deeply ingrained the housing boom was in China’s economic growth. When housing prices came down, people’s wealth was washed away. Housing companies couldn’t afford to pay back the debts they had accumulated, and many of the homes they had promised to build for homebuyers based on projected revenues never came to fruition. My grandfather’s brother, for example, is now the proud owner of an apartment without a roof…or walls. Xi’s tendency to deal with every problem using government crackdowns is a bad sign for a country that thrived off of free market reforms.

Speaking of crackdowns, the most prominent of these has to have been during the COVID-19 pandemic, when the government instituted draconian lockdowns nationwide. For public health reasons, Xi’s government arbitrarily stopped businesses from operating in major cities from Shanghai to Beijing. Though the lockdowns are now over, the crisis of confidence remains. Many CEOs began to realize how vulnerable their businesses were to state intervention. Western companies like Microsoft, Dell, and Airbnb began scaling back operations, while 69% of Chinese firms decided to start moving operations out of the country. One of my father’s college friends, who started his own company in China, says he’s planning to sell off the stock he owns and move to Singapore. He looks to an order signed by Xi that outlawed all tutoring companies nationwide overnight, and concludes that any day now, the government could do the same with his company. Many other CEOs are thinking the same way.

Even without lockdowns and business-crushing regulations, many in the private sector find it difficult to survive. The business environment heavily favors state-owned firms instead of private companies, even though the private sector accounts for 60% of China’s GDP. For example, according to the Peterson Institute of International Economics, in the first half of 2023, investment in China’s private sector dropped by 0.2%, while the share for the public sector grew by 8.1%. The fundamental reason lies in unwritten rules within the hierarchical state-run banking system. Often in China, officials within banks are told that if they lend money to a state-owned firm, and the money is lost, it’s not the lender’s fault since the Communist party members who ran that other company are to blame. However, if they lend money to private enterprises, and that company loses their money, the lender who signed the deal is often forced to resign in disgrace. For this reason, Chinese state banks are often afraid to lend money to the private sector. My uncle, a CCP member working in a state-owned company, tells me that every month, state-owned banks would approach his office begging him to take their money. Meanwhile, the private sector, thirsty for a monetary infusion, is left without support. What kinds of businesses can grow in this kind of environment?

6 trillion yuan. That headline number is eye-catching. Yet brewing beneath the surface is a system that continues to underperform on the key indicators of growth. Unless there is fundamental reform, any amount of stimulus won’t stop businesses from leaving, or consumers from not spending.