What are the biggest problems for the Chinese economy at the moment?

  • Excess production capacity: the Chinese government hoped that the BRI (Belt and Road Initiative) would take up some of this capacity, but this project has come under fire from non-Chinese in 2018, so that it is unlikely to accept this excess capacity. Chinese SOEs will have to adjust to this new reality.
  • The Chinese private sector does not trust the Chinese government, specifically the leadership of the Chinese Communist Party. The Chinese private sector has been responsible for most of China’s growth over the past 30 years, but given a chance, most private Chinese business owners prefer to leave China. This is in spite of recent comments from President Xi directing the party to support the private sector. Most believe that this is just talk, and are still preparing to leave.
  • President Xi has been emphasizing the leadership of the Chinese Communist Party during its next stage of reforms. Most private business leaders were hoping for more space for the private sector, but they are not seeing that, which is why they want to leave China.
  • The US tariffs have hit the Chinese economy very hard, starting with Chinese equity markets. Many manufacturers are complaining that their orders are drying up.
  • Internal reforms in the Chinese Communist Party are happening too slowly. For the past 40 years, the emphasis has been on increasing production capacity and on real estate value growth. There is too much production capacity, and real estate values have largely plateaued; so what is going to replace them? Nobody seems to have any ideas, and most officials are sitting on their hands.

Two years ago, the Chinese government bet on the BRI as part of China’s next stage of growth, but outside China, in countries like Pakistan and Malaysia, it is much less popular. But the Chinese government had no Plan B.

Also, the Trump administration has identified China as a bad player internationally, and this seems like one of the issues which Republicans and Democrats can agree on. The Chinese government got too comfortable under previous US administrations, and assumed that the US would just peacefully move aside and let China become the leader. How naive!

This has put the Chinese government very much on the defensive in 2018, and it is not quite sure how to react.

In 2018, just about everything which could go wrong did go wrong for China.

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