Key Obstacles to China's Economic Growth: Youth Unemployment and Real Estate Crisis

As reported by recent data, China's economy struggles with high youth unemployment, a real estate crisis, and weak investment. These factors, trade tensions, and financial pressures pose significant obstacles to sustained growth.

China's Economy Faces Challenges from High Youth Unemployment and Real Estate Crisis

Consumption, one of the primary drivers of the Chinese economy, is being weakened by a high youth unemployment rate—14.2 percent in May—and economic uncertainties.

In October of last year, China experienced four months of deflation, culminating in the most significant decrease in consumer prices in 14 years in January.

According to data released on July 10, they have since returned to positive territory, but their growth has been modest, with June's increase amounting to only 0.2 percent.

Stagnant or declining prices negatively impact the economy's health. This necessitates firms to reduce production in the absence of demand or reduce their stockpiles, which negatively affects their profitability and willingness to employ.

Real Estate in Crisis

The property sector, which experienced two decades of rapid expansion as the population's standard of living improved, has historically contributed more than 25% of China's GDP.

However, it has been under pressure since the government tightened credit conditions for property groups in 2020 to reduce their debt. Numerous organizations of this nature are currently on the brink of bankruptcy.

This discourages Chinese individuals from investing in property, mainly because real estate in China is frequently acquired before completion.

The decrease in prices per square meter is also a financial setback for householders, who have traditionally regarded property as a secure investment.

Local Authorities in Debt

Some local authorities are currently experiencing financial constraints due to a property crisis that has deprived them of a significant source of revenue and three years of excessive expenditures to combat the COVID-19 pandemic.

According to analysts at SinoInsider (via The Economic Times), an American consultancy specializing in China, the economic environment exacerbates their challenges.

Additionally, they have noted that specific organizations have recently expressed concerns regarding tax arrears that date back to the 1990s.

SinoInsider observed that local governments are "trying various methods" to increase their revenues, which may have the unintended consequence of undermining businesses that the economic situation has already tested.

Trade Under Pressure

The authorities of China are also concerned about the country's exports.

Throughout history, they have been a significant factor in driving development and directly affect the employment of thousands of companies.

However, the sector faces significant pressure from geopolitical tensions between Beijing and Washington and those with the European Union, a critical trading partner for the Asian behemoth.

The EU made a decision that could become definitive in November in early July when it imposed up to 38 percent additional customs duties on imported Chinese electric cars.

Brussels accuses Beijing of providing subsidies to its manufacturers in an illicit manner.

Weak Investment

Foreign investment is hindered by China's economic situation, geopolitical tensions with Washington, and the threat they pose to supply chains.

In recent months, Chinese leaders have intensified their efforts to attract foreign business leaders, asserting that the Chinese economy has potential due to its open doors and encouragement of private investment.

Nevertheless, the commerce ministry's figures indicate that foreign investment experienced a 28 percent year-over-year decline from January to May.

Financial Pressure

SinoInsider asserted that the financial sector hesitates to invest in traditional growth sectors due to the current economic climate, contributing to an "asset shortage."

Conversely, it purchases increasing "risk-free" long-term government bonds, decreasing yields.

SinoInsider cautioned that this contributes to the depreciation of the Chinese currency, which may accelerate capital flight.