China’s economic downturn is not a sudden occurrence, but a predictable outcome of its growth model. This model, reliant on investment-led growth, has led to an overproduction of goods and services. The resulting glut in supply has caused a drop in prices, leading to deflation.
To combat this, China has been artificially inflating demand by encouraging lending. However, this has led to a surge in debt levels, which are unsustainable in the long term. This has been exacerbated by a lack of financial discipline, with banks often lending to unprofitable state-owned firms.
China’s attempts to transition to a more sustainable, consumption-led growth model have been hindered by its ageing population. With fewer young people to drive demand, consumption levels have been unable to keep up with supply, leading to further deflation.
China’s economic woes are not purely domestic. The country’s slowdown has had a knock-on effect on the global economy, with countries that rely on exporting commodities to China being particularly hard hit.
In the short term, China’s downturn is likely to continue. The country’s leaders will need to implement difficult reforms, such as restructuring state-owned firms and reforming the financial sector, to put the economy back on a sustainable path.
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