A crisis of confidence is gripping China’s economy

Earlier this year, David Yang was brimming with confidence about the prospects for his perfume factory in eastern China.

After nearly three years of paralysing Covid lockdowns, China had lifted its restrictions in late 2022. The economy seemed destined to roar back to life. Yang and his two business partners invested more than $60,000 in March to expand production capacity at the factory, expecting a wave of growth.

But the new business never materialized. In fact, it’s worse. People are not spending, he said, and orders are one-third of what they were five years ago.

“It is disheartening,” Yang said. “The economy is really going downhill right now.”

For much of the past four decades, China’s economy seemed like an unstoppable force, the engine behind the country’s rise to a global superpower. But the economy is now plagued by a series of crises. A real estate crisis born from years of overbuilding and excessive borrowing is running alongside a larger debt crisis, while young people are struggling with record joblessness. And amid the drip feed of bad economic news, a new crisis is emerging: a crisis of confidence.

A growing lack of faith in the future of the Chinese economy is verging on despair. Consumers are holding back on spending. Businesses are reluctant to invest and create jobs. And would-be entrepreneurs are not starting new businesses.

“Low confidence is a major issue in the Chinese economy now,” said Larry Hu, chief China economist for Macquarie Group, an Australian financial services firm.

Hu said the erosion of confidence was fuelling a downward spiral that fed on itself. Chinese consumers aren’t spending because they are worried about job prospects, while companies are cutting costs and holding back on hiring because consumers aren’t spending.

In the past few weeks, investors have pulled more than $10 billion out of China’s stock markets. On Thursday, China’s top securities regulator summoned executives at the country’s national pension funds, top banks and insurers to pressure them to invest more in Chinese stocks, according to Caixin, an economics magazine. Last week, stocks in Hong Kong fell into a bear market, down more than 20% from their high in January.

From its resilience to past challenges, China forged a deep belief in its economy and its state-controlled model. It rebounded quickly in 2009 from the global financial meltdown, and in spectacular fashion. It weathered a Trump administration trade war and proved its indispensability. When the pandemic dragged down the rest of the world, China’s economy bounced back with vigor. The Global Times, a mouthpiece for the Chinese Communist Party, declared in 2022 that China was the “unstoppable miracle.”

One factor contributing to the current confidence deficit is the prospect that China’s policymakers have fewer good options to fight the downturn than in the past.

In 2018, with the economy in a trade war with the United States and its stock market nose-diving, Xi Jinping, China’s leader, gave a rousing speech.

Xi was addressing an international trade fair in Shanghai and sought to quell the uncertainty: No one should ever waver in their confidence about the Chinese economy, despite some ups and downs, he said.

“The Chinese economy is not a pond, but an ocean,” Xi said. “The ocean may have its calm days, but big winds and storms are only to be expected. Without them, the ocean wouldn’t be what it is. Big winds and storms may upset a pond, but never an ocean. When you talk about the future of the Chinese economy, you have every reason to be confident.”

But in recent months, Xi has said little about the economy.

Unlike past crises that were international in nature, China is confronted by a convergence of long-simmering domestic problems — some a result of policy changes carried out by Xi’s government.

After the 2008 financial crisis, China unleashed a huge stimulus package to get the economy moving again. In 2015, when its real estate market was teetering, Beijing handed out cash to consumers to replace run-down shacks with new apartments as part of an urban redevelopment plan that gave rise to another building boom in smaller Chinese cities.

Now policymakers are confronting a far different landscape, forcing them to rethink the usual playbook. Local governments and businesses are saddled with more debt and less leeway to borrow heavily and spend liberally. And after decades of infrastructure investments, there isn’t as much need for another airport or bridge — the types of big projects that would spur the economy.

China’s policymakers are also handcuffed because they introduced many of the measures that precipitated the economic problems. The “zero COVID” lockdowns brought the economy to a standstill. The real estate market is reeling from the government’s measures from three years ago to curb heavy borrowing by developers, while crackdowns on the fast-growing technology industry prompted many tech firms to scale back their ambitions and the size of their workforces.