China’s Economy: Current Trends and Issues





Updated September 27, 2023
China’s Economy: Current Trends and Issues
In 2023, the People’s Republic of China (PRC or China)
the government may be forced to resort to bolder support
emerged from two years of “zero-COVID” policies that
measures before the end of 2023.
significantly curtailed its domestic and global economic
Systemic Economic Challenges
activity. Weak domestic demand, a decline in domestic and
China faces economic challenges that predate the pandemic,
foreign confidence in China’s market, and persistent
including slowing domestic growth, rising labor costs, trade
systemic debt pressures, particularly in the property market,
pressures including U.S. tariffs, consumer uncertainty, and
continue to constrain the government’s efforts to jumpstart
rising corporate and government debt levels. China’s total
growth. In 2022, China relied on investment and exports to
non-financial debt—household, corporate, and
achieve a gross domestic product (GDP) growth rate of 3%,
government—reached 297% of GDP in 2022 (Figure 2),
well below initial government and international projections.
with most debt held by private firms and provincial and
Many economists contend that China will experience
local governments. China’s strict “zero-COVID”
similar growth rates going forward as the economic returns
lockdowns exacerbated these issues. Local governments
of China’s traditional growth model diminish and as the
and firms have relied heavily on debt (bank loans and bond
economy faces other constraints, such as an aging
issuances) to spur economic activity via fixed-asset
population. The government is targeting 5% GDP growth in
investment as consumer spending has lagged. Data from the
2023. The International Monetary Fund (IMF) projects that
People’s Bank of China indicates that bank loan issuance
China’s economy could grow by 4.5% to 5% in 2023,
rose 8.8% year-on-year in August 2023, and China’s central
particularly if Beijing were to adopt economic reforms and
government finalized plans to allow local governments to
stimulus measures that could increase domestic
issue special-purpose bonds totaling approximately RMB
consumption.
3.8 trillion ($519 billion) in September 2023.
Figure 1. Composition of China’s Economy
Figure 2. Nonfinancial Debt as Share of China’s GDP

Source: CRS with data from the World Bank and China’s National

Bureau of Statistics (NBS).
Source: CRS with data from the Bank for International Settlements.
Note: Gross capital formation consists of outlays on additions to the
Notes: *Government debt in nominal value. Comparable U.S. debt
fixed assets of the economy plus net changes in inventories levels.
was 255.6% of GDP in 2022.
Efforts to Boost and Rebalance Growth
In 2016, the PRC government initiated a campaign to rein
PRC leaders have been reluctant to adopt major economic
in debt accrued by banks, local governments, and
stimulus measures to boost falling household consumption
unauthorized lending. The effort included scrutiny of
as they try to deleverage the economy, reduce debt levels,
overseas investments and curtailment of certain state firms
and contain market risks (Figure I). In 2022, the PRC
such as HNA Group. The government restructured these
government used targeted measures to boost growth such as
firms’ debt and aligned investments with state goals,
value added tax (VAT) rebates for exports and tax
established state trusteeship, and transferred assets to state
incentives for research and technology. In 2023, the
investors. In 2018, Xi Jinping pledged to tackle financial
government has sought narrow efforts to boost domestic
risk as one of “three tough battles.” The campaign led to
consumption and confidence in China’s private sector. In
several bank bailouts in 2019, but defaults fell in 2020 due
July 2023, the government announced consumer financing
to pandemic stimulus and laxer rules. Local government
for purchases of electric vehicles (EVs) and consumer
balance sheets further deteriorated with the burden of
electronics, sectors facing overcapacity. China’s economic
pandemic mitigation efforts and initial stimulus programs
planning agency concurrently announced opportunities for
falling almost entirely on local governments.
private firms to invest in transportation, clean energy,
As local and provincial fiscal conditions worsened, China
infrastructure, advanced manufacturing, and agricultural
projects. These efforts may prove insufficient to expand
faced a series of defaults by its major property developers
tied to local governments, most notably China Evergrande
domestic demand, and, if economic sluggishness continues,
Group and Country Garden. Income from property sales is a
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China’s Economy: Current Trends and Issues
main source of local government revenue and a key factor
and PRC interest rates. The central bank sets a narrow band
in firms’ valuations and household net worth. This
within which the RMB can trade through daily guidance to
constrains policy options, despite Xi Jinping’s statements
PRC banks. In August 2023, the central bank set the RMB’s
that support reducing debt and his “common prosperity”
rate well above the market rate; PRC state banks sought to
policy to address growing economic inequality among
stem the RMB’s depreciation by selling U.S. dollars. In
China’s provinces and demographic groups.
September 2023, China’s central bank decreased the
China’s slowing economy and crackdown on the private
amount of foreign currency deposits it requires banks to
sector, including education, real estate, and technology
hold. As of this writing, China remains on the Treasury
industries, over the past three years has disproportionately
Department’s watch list for currency practices of concern
affected younger workers. They have also been hit hard by
due to its failure to publish exchange rate intervention data.
a slowdown in the service sector and by systemic issues,
PRC’s Broad Economic Policy Direction
such as a mismatch in the skills and expectations of college
graduates and the types of available jobs. In June 2023,
China’s 14th Five-Year Plan (FYP) (2021-2025) emphasizes national
China recorded a youth unemployment rate of 21.3% (See
development priorities in basic research, education, finance, and
Figure 3). China’s National Bureau of Statistics
technology and cal s for $1.4 tril ion in investment over 5 years in
subsequently said it would stop publishing data on youth
digital infrastructure. The FYP emphasizes self-reliance and indigenous
unemployment.
innovation while seeking to sustain access to foreign markets,
Figure 3. China’s Monthly Unemployment Rate (%)
technology, and research. It also promotes China’s extraterritorial
reach and global acceptance of China’s judicial rulings on intel ectual
property and technology pricing, and antitrust actions.
Xi is advancing a strong state role in the economy and cal ing for
China’s leadership in setting global trade rules and technical standards.
China has issued a series of national economic security measures since
2020, including an export control law and anti-foreign sanctions law,
potential y to counter U.S. policy actions. Beijing is developing a
central bank digital currency to influence global finance and
ecommerce, diversify from U.S. dollar financing, and evade U.S.
sanctions. The 14th FYP prioritizes self-sufficiency and supply chain

security in energy and agriculture, including biotechnology, genetic
Source: CRS with data from China’s National Bureau of Statistics
resources, and seeds.
Note: China’s real unemployment rates tends to be much higher
Xi has revived a “dual circulation” policy first used in the 2009
than the PRC official rates presented in NBS data.
financial crisis. Some experts assess the term refers to boosting
Trade, Foreign Investment, and Currency
consumption, but the term is more complex. It refers to leveraging
China’s goods and services exports rose in 2022 by 7%
the dual forces of domestic and global demand, or developing
from 2021, bringing China’s global trade surplus to a record
domestic capacity while pursuing openings in global markets. In 2009,
$877.6 billion. Trade grew by 0.4% in the first 7 months of
the government used this approach to subsidize increased production
2023; the external sector has not buffered the economy as it
in 13 industries while global industry contracted, generating excess
has in other slowdowns. China is looking to boost exports
capacity that China exported to other markets. Currently, sectors
in sectors such as EVs that face overcapacity. A 2018
that receive similar domestic support that are positioning to export
outbreak of African Swine Fever decimated China’s pork
include renewable energy, EVs, and semiconductors.
herd, and a poor wheat harvest and low soybean yields have
Issues for Congress
elevated the role of trade to fill production gaps. China’s
Congress might consider how China’s economic problems
coercion of foreign suppliers exacerbated its grain and
may offer an opportunity for the United States to set trade
energy shortfalls in 2021. Since late 2022, China has
and investment terms that advantage the United States and
increased imports of grain, oil, and gas, including from the
address China’s statist economic practices. As China’s
United States and Russia.
growth slows, it is looking to foreign markets to expand and
Economic softening in China; business takeaways from
compensate for domestic gaps and weaknesses. China’s
China’s “zero COVID” policies; China’s political and
industrial policies emphasize a goal of self-reliance but seek
economic tightening and economic coercion; and foreign
U.S. technology, research, and capital. Similarly, China is
technology controls on China have fueled a sense of risk in
returning to trade partners it recently shunned or coerced,
the China market, prompting some firms to migrate parts of
such as Australia. Ongoing efforts by the United States and
supply chains out of China. There have been periods of
allies and partners to diversify away from China in this
large capital outflows from China in 2022 and 2023.
context could increase U.S. options and leverage. Congress
Beijing has used the optics of CEO visits and investments
also might consider how U.S ties to China’s technology and
in key sectors (e.g., biotechnology and semiconductors) to
industrial policies support the development of PRC
try to boost market confidence. The government’s raid on
capabilities, and determine how, if at all, to address these
foreign market research firms and efforts to restrict negative
issues in light of growing restrictions and market risks in
economic commentary, however, have fostered a business
China.
chill and raised the sense of China market risks.
China’s currency the renminbi (RMB) continues to face
Karen M. Sutter, Specialist in Asian Trade and Finance
downward pressures from a low confidence in China’s
Michael D. Sutherland, Analyst in International Trade and
market, a strong U.S dollar, and widening gap between U.S.
Finance
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China’s Economy: Current Trends and Issues

IF11667


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