It’s a brutal year for most countries’ economies, as inflation rises to highs unseen in decades and lingering pandemic disruptions create financial uncertainty for billions of people. In China, long accustomed to strong economic indicators, GDP growth has been largely stagnant this year, as Covid restrictions lock down factories and major cities. But the coronavirus doesn’t explain other signs of economic distress in the country. Many global tech companies have flourished during the pandemic, yet the Chinese tech sector has lost more than US$1 trillion in market value since 2020, with the government in Beijing cracking down on some of the country’s biggest tech corporations. Public protests broke out in many Chinese cities this summer, as homebuyers in 24 out of 31 provinces boycotted their mortgage payments on unfinished apartments. Several regional banks have now collapsed, and the unemployment rate has hit nearly 20 percent for people between 16 and 24 years old. Apple, Microsoft, and Amazon have moved some electronics production out of the country altogether. What’s going on here?

Jeremy Mark is a senior fellow in the Geoeconomics Center of the Atlantic Council, a policy institute in Washington, and formerly a reporter and editor for The Wall Street Journal based in Singapore, Taiwan, and Japan. As Mark sees it, Covid is harming China’s economic performance, but below this phenomenon, the country is suffering from more fundamental issues that make its post-Covid prospects highly uncertain. Some of the problems come from how rapid China’s growth was in previous decades, leaving it today in need of developing a new, more advanced economy, less dependent on low-wage manufacturing. But a major economic—and increasingly, political—threat is now inequality, with nearly half of Chinese people still living on less than $150 a month. Under President Xi Jinping, the state has meanwhile become more protective of its power, weakening rival power centers, including the leading tech firms. And Beijing now faces the critical question of how to deal with enormous debt in the property sector, which is damaging developers, banks, and households. The critical choices facing Xi and the Chinese Communist Party, Mark says, will determine whether China pursues a more state-directed or private-sector model for the world’s second-largest economy.

Michael Bluhm: How would you describe the current condition of the Chinese economy?

Jeremy Mark: China’s Zero Covid response to the coronavirus—the shutdowns of cities and restrictions on travel, all aimed at containing the virus—has seriously damaged the country’s economy, but it’s only one of several factors. It’s the straw breaking the camel’s back. The result is GDP growth that’ll probably be below 3 percent this year, which for China is the equivalent of a recession. In 2021, growth was 8 percent.

Beyond Covid, the Chinese economy faces serious structural problems. Public policies in recent years have led to self-inflicted wounds, and Zero Covid is only the most recent example. The biggest structural issue is China’s need to upgrade its manufacturing sector and move beyond low-end manufacturing based on cheap labor. It also needs a modern financial system, because the current system is hampering growth. And it’s facing the reality of a rapidly aging, shrinking population. All these transitions are becoming harder and harder for the government in Beijing.

The single most pressing structural issue right now, though, is that China’s rapid growth over the past decade has been accompanied by the massive accumulation of corporate and household debt in the property sector. The instability of this sector is threatening a large part of corporate China. It’s also threatening households, whose wealth has largely been based on real estate. It’s threatening local governments that have come to depend on property development for revenue. And now it’s even threatening many Chinese financial institutions. How the core issue of this property bubble is resolved will substantially affect China’s future economic course.

Norbert Braun

Bluhm: You mention policy decisions beyond Zero Covid having contributed to China’s economic problems. What do you have in mind?

Mark: The governance of China has become the domain of a single man, President Xi Jinping, whose interests are now focused on the accumulation of power for himself and the Chinese Communist Party—and on a very specific vision of China’s future. The Chinese Communist Party, the CCP, will hold its 20th Party Congress next month, which will re-elect him as the party leader, after which we can expect to see the continuation of Xi’s one-man rule for the foreseeable future.

This has serious implications for the economy, because Xi has made a series of policy decisions that have hurt the economy—what I referred to as self-inflicted wounds—and growth is weak. Consumer confidence has been undermined, and Xi has made things worse by cracking down on China’s tech sector and humiliating a lot of China’s most successful entrepreneurs. And he’s overseen policy actions that have punctured the property bubble without any clear vision of how the government will prevent a financial crisis.

All this has undermined many Chinese people’s dreams for their future. And it’s taking place at a time when the global economy is struggling to cope with the effects of Covid, soaring energy and food prices, and the Ukraine war. As a result, we’re likely to see a drop-off in demand for Chinese exports in the coming year—and then that will only make matters worse.

Beyond Covid, the Chinese economy faces serious structural problems.

Bluhm: You mention serious problems in the property sector. The public protests by some homebuyers, many of whom are refusing to pay mortgages for homes that haven’t been built, are one of the most visible signs of China’s economic difficulties. How did this become such a crisis?

Mark: Until recent years, property—encompassing everything from buying and selling houses to construction, to the production of things for building homes, like cement and steel—likely represented as much as 30 percent of Chinese GDP. It’s really been a driver of Chinese growth. It’s also been one of the greatest financial bets in the global economy in the past generation. Chinese people and foreigners have made money investing in Chinese property; very few have lost money.

But now there’s a crisis, and trillions of dollars of investments and loans are at stake. Some of China’s biggest private-sector companies are property developers—and they’ve pumped up the property sector by buying land from local governments, taking out loans, constructing buildings, taking money from consumers, putting some of that money into finishing apartments, and putting more of that money into their next projects.

They’re doing this on a nationwide scale, and the debt that’s built up is astronomical. For example, Evergrande is one of the largest property companies, and it’s in deep trouble, with more than $300 billion in liabilities, such as loans and commitments to homebuyers and suppliers.

This crisis can’t be easily overcome. More and more, property companies are falling into it. They’ve defaulted on bonds that they’ve issued overseas and are denominated in dollars. Loans are going bad.

Denny Ryanto

The presale process involves millions of would-be homeowners putting money down at the beginning and waiting for apartments to be built. But now these companies can’t finish the apartments. So now you’re seeing protests and mortgage boycotts around the country, as people wait for apartments that aren’t being completed.

And it’s not mainly first-time homebuyers. China’s financial markets are underdeveloped, so millions of people are investing in multiple homes instead of the stock market. In 2008, 70 percent of home purchases were by first-time buyers. In 2018, only 20 percent were by first-time buyers. There’s a lot of property speculation going on.

Bluhm: There’ve been a lot of news stories recently about major foreign firms leaving China; at the same time, a larger number of manufacturing firms is moving out. Why are all these companies leaving China, and how much is it harming the economy?

Mark: A lot of this has to do with the structural changes taking place in the Chinese economy: As China becomes wealthier, wages go up. Land prices go up too. China becomes less attractive to companies as a manufacturing center. There are labor shortages because workers won’t work for low wages.

This has happened to a lot of countries. The U.S. would be a prime example. Lower-cost manufacturing goes to where expenses are lower. The production of textiles, simple electronics, and so on—that’s moved to countries like Indonesia, Bangladesh, and Mexico.

The Chinese Communist Party, led by Xi Jinping, has been reasserting much more control in recent years over the daily lives of Chinese people and the workings of the Chinese economy.

There are other factors. The U.S. is cracking down on technology sales to China and technology investments there. Higher-end manufacturers like Apple are starting to diversify their production bases in order to avoid these issues. Also, Taiwanese companies that have been crucial to China’s development as a manufacturing center, are leaving because of the political tensions in the Taiwan Strait.

And then, another factor is Zero Covid. The government’s shutdowns of cities and manufacturing centers, as well as restrictions on international travel, are becoming a real headache. The result is a divergence—or a bifurcation—in foreign investment: Those companies committed to the China market are going to stay, and those producing in China in order to sell to the Chinese are going to stay; but lots of companies that have used China as an export base are going to move elsewhere. This process has started, and more companies are saying they’re going to do it. The trend is building.

Bluhm: You mention self-inflicted wounds and, in particular, the regulatory crackdown on the tech sector. That’s damaged most of China’s biggest tech firms, and many companies have laid off workers and posted quarterly losses for the first time ever. The tech sector’s market value has dropped by $1 trillion. Why did the government do this?

Mark: It’s a good question—on a lot of people’s minds. There’s not an easy answer. But it’s politics: The Chinese Communist Party, led by Xi Jinping, has been reasserting much more control in recent years over the daily lives of Chinese people and the workings of the Chinese economy. This was partly a reaction to the laissez-faire approach of the previous leadership, which had resulted in a lot of corruption.

Chastagner Thierry

But Party leaders were greatly concerned by the social trends emerging from what made these tech companies so successful. So you’ve seen a crackdown in online education, which was seen as profiteering at the expense of parents trying to raise successful children. It was also seen as widening inequalities in Chinese society, because only the very well-off could afford to get the best education through these profit-making companies.

There was a crackdown on online video games and movie streaming, because the authorities felt that too many young people were spending too much time in unproductive pursuits, as opposed to a more serious, nationalistic approach to education and daily life.

There were grave concerns about monopolistic behavior by big tech companies, as well, which dominate retail, online payments, and other sectors—and a feeling that these companies were violating laws, necessitating extensive new laws to control the companies. Ultimately, the Party saw a competing power center emerging among many of the most successful capitalists—and they cracked the whip.

The damage to these companies was justified ideologically because a lot of their success was in so-called “unproductive” areas. There was a shift toward investing resources in hard technology—semiconductors, biotech, artificial intelligence, etc.—that could drive upgrades in the Chinese economy.

The end result is exactly what you’ve described: a massive hit to the bottom line of companies that have been key employers for Chinese college graduates. It was also a hit to the stock-market capitalization of a lot of these companies, which has hurt a lot of Chinese and foreign investors. You have to wonder whether the government had taken this into account before they moved.

For all the sense there is of China as a very prosperous, modern country, the fact is that 600 million Chinese live on an income of less than $150 a month. The gap between rich and poor—and even between the middle class and the poor—has been growing and is now very wide.

Bluhm: Youth unemployment has also been rising in China, and there’ve been protests and a lot of online anger about declining opportunities. What’s going on there?

Mark: The biggest issue is that there are deep inequalities in Chinese society. For all the sense there is of China as a very prosperous, modern country, the fact is that 600 million Chinese live on an income of less than $150 a month. The gap between rich and poor—and even between the middle class and the poor—has been growing and is now very wide.

And you see this reflected in educational inequality. Only one-quarter of the labor force has a high-school degree. By one estimate in 2018, only 13 percent of young men in the countryside had one.

Xi Jinping and the Chinese Communist Party are very focused on this because, if you’re talking about sources of potential unrest in the future, 600 million people who don’t have a middle-class income are a much bigger cause for worry than high-school and college graduates who’re having trouble finding jobs.

That said, urban youth unemployment has risen sharply to around 20 percent. About 13 million Chinese college graduates entered the workforce this year, when one of the main sources of employment—tech companies—is cutting employment and hiring less.

This occurs just as China is trying to upgrade its manufacturing and become a high-tech manufacturing hub. All this suggests that there are many profoundly difficult challenges that have to be addressed if China is to emerge as a wealthy, leading global economy. And there are a lot of doubts about that right now. Some talk about China overtaking the U.S. as the largest economy in the world by 2025 or 2030. Now this may not happen until much later—or at all.


Bluhm: China’s economy has had problems before, but it’s kept growing at a tremendous rate—often above 8 percent GDP growth a year—for decades. Even with the problems today, how do you see the most likely scenarios for the country’s long-term economic outlook?

Mark: China has done a very good job of problem-solving, as different economic issues have presented themselves in the 40-odd years since they began moving toward reform and opening. But today’s issues are much more complex. None of them is going to be easy to solve, particularly the debt issue. How Beijing decides to get past this property crisis will determine the next 10 to 20 years for China.

They can muddle through, and the central government has vast financial resources—but a crisis like this is going to require vast financial resources. And the question is how they’re going to move to address some of the deep problems that have emerged across local government, the private sector, and state-owned companies.

China could very well end up going through a period of very slow growth that will make it much more difficult to meet the needs of its people, particularly the hundreds of millions who haven’t benefited as the middle class and the wealthy have benefited. There are key questions about the relative roles of the private sector and the state sector—and Beijing’s impulses in recent years have been toward a statist response, such as reining in the tech companies, which hasn’t helped the economy.

Are they going to take over property-development companies and have much more of a state-directed property sector? These are all very important, difficult questions.

It’s highly unlikely that the economic crisis will end up weakening the CCP’s hold on China. The party’s top priority has been maintaining party control, and everything else is secondary.

Bluhm: What could these economic problems mean for Xi Jinping and the Chinese Communist Party?

Mark: The Chinese leadership is not transparent. But it’s clear that Xi Jinping is firmly in control now and probably will have tremendous influence over the leadership to be announced next month at the Party Congress.

The government and the party are very aware of the challenges they face. The key question is whether technocrats or politicians and ideologues will have the main say. The tech crackdown demonstrated that ideological impulses were stronger. The government has pulled back and declared its support for the tech sector, but the overall trend has been much tighter state control—and I suspect that that impulse will continue as they try to resolve the property crisis and other economic issues.

It’s highly unlikely that the economic crisis will end up weakening the CCP’s hold on China. The party’s top priority has been maintaining party control, and everything else is secondary. I don’t think you’re going to see any significant shift in policy in the face of this economic crisis.

Bluhm: Beijing attracted a lot of attention with its Belt and Road Initiative—China’s economic and political plan for building global infrastructure and forging political and economic alliances. The country has also been moving toward establishing military bases in Africa. What difference could China’s slowing economy make for the country’s global ambitions?

Jack le Roux

Mark: China is an emerging power—and will remain one. A key reason is that China remains an important engine of global growth, whether domestic GDP growth is 8 percent or 3 percent a year. Chinese demand is really important for developing and advanced economies.

That said, China is already scaling back its global ambitions. You mention the Belt and Road Initiative, which is a massive wave of Chinese lending to trade partners to build infrastructure ranging from ports and roads to digital infrastructure. But this has engendered serious debt problems in many developing countries. China has significantly scaled back its lending since 2018, and now its international image has been hurt by the debt problems resulting from Covid’s economic slowdown.

A lot of the exceptional confidence that China had when it started pursuing its international ambitions has already dissipated, but the country will continue to have political ambitions abroad—and it’ll continue to tie these political ambitions to its economic needs and economic power.

We’re not going to see China retreat into a shell in the coming years—certainly not as a regional power with ambitions in the South China Sea or in its bellicosity toward Taiwan and other neighbors. I don’t think that’s going to change significantly anytime soon.

Ultimately, the biggest challenge for China is domestic. In order to be able to project power abroad, China will have to keep delivering the goods to the people at home.