China’s economy faces lopsided supply problems, years in the making

• China has fueled decades of economic growth with industrialization, huge exports, and foreign investments.
• That model is starting to show its weaknesses, however, as it’s created a lopsided economy with too much supply and soft demand.
• “Stimulus functions on the supply side, and on the demand side you need structural reforms. You need to give people more confidence.”

Over four decades, Beijing has spurred massive growth and brought hundreds of millions of its citizens out of poverty, but the economic model that drove that boom seems to be losing legs.

By more than one measure China now appears to be slowing down considerably, with slumping trade and an ailing property sector, historic youth unemployment and a lack of consumer confidence, and major firms missing bond payments.

Everything appears to be boiling over all at once, but China’s problems have been years in the making. 

“China had a very robust if imperfect delivery of high levels of economic growth based on export pricing and foreign direct investment during 1994 to 2008,” William Hurst, deputy director for the Centre for Geopolitics at the University of Cambridge, told Insider. “After the 2008 crisis and the end of that model, there hasn’t been a new equilibrium.”

Policymakers have made a habit of prioritizing strategies that bolster the supply-side of China’s economy, much of which entails short-term actions like interest rate adjustments, decreasing taxes, and rapid fiscal stimulus that can boost business. 

While this approach can indeed catalyze growth, ignoring the demand side of the equation comes with risks. Hurst said it’s long been known that China had to figure out how to boost domestic consumption and motivate people to spend, but that’s not yet materialized in policy.

Confidence crisis

These issues have manifested most clearly in the real estate market, which now faces a glut of inventory thanks to years of overbuilding. 

When the risks of a property crisis grow, that weighs on consumer confidence — people save money rather than spend it, which then raises the odds of further declines in real estate values, which in turn eats away even more at household wealth. 

China currently has enough empty apartments to meet seven years’ worth of demand, the New York Times reported, while consumer-oriented sectors like travel or dining have notably lagged behind. 

The country also doesn’t have a robust consumer-driven economy to fall back on, and it hasn’t built a system that includes social safety nets or other means of boosting confidence.

Oversupply leads to speculative buying, and that’s created an economy where about 70% of Chinese households’ wealth comes from housing assets, according to The Conference Board. 

Connected to that is 30% of local government revenues come from land sales to developers — two of which, China Evergrande and Country Garden Holdings, made headlines this month for filing for bankruptcy and missing bond payments, respectively.

“Demand-side imbalances are long term,” Alfredo Montufar-Helu, the head of the Conference Board’s China Center, told Insider. “To transition from an industrialization-led economy to a consumption-led economy, you have to sustainably increase consumption, and a key driver of this is diminishing the need for precautionary savings.”

The fundamental issue, the Cambridge scholar explained, is that China has relied on short-term remedies rather than making any lasting structural changes to its economy. Spending and lending packages make asset bubbles worse, crowd out consumption, and cap more productive investments, and ultimately make systemic changes harder to implement later. 

“There’s a strong pressure or temptation for the state to intervene with more stimulus to avert a short-term crisis, but that doesn’t solve the long-term issues,” Hurst said. “There could be a real rapid decline in real estate prices that would hurt a lot of people’s livelihoods.”