Risk to resilience: China’s economic security strategy

(MENAFN- Asia Times) This article was originally published by Pacific Forum, a Honolulu-based foreign policy research institute founded in 1975.

In 2014, at the founding meeting of the National Security Commission, China officially introduced the concept of “overall national security”, with economic security as the basis.

Ensuring economic security, within this framework, involves improving China’s economic strength while controlling financial risks and promoting economic resilience. However, the unforeseen COVID-19 pandemic exposed China’s economic vulnerabilities, leading to a post-pandemic recovery that was slower than many observers had expected.

With the external environment challenging, theories such as “peak China” predict a pessimistic future for the Chinese economy and warn of a more aggressive Beijing as it loses its legitimacy rooted in decades of remarkable economic growth.

Domestically, China faces challenges on two fronts: demographic shift and financial risks concentrated in the real estate sector and local governments (LGs). The long-term effects of the one-child policy (1979-2015) and rising life expectancy are putting pressure on China’s shrinking working-age population and fragile social safety net.

In the short term, high urban youth unemployment rates reflect both cyclical and structural problems in the Chinese labor market. The highly competitive environment and financial stress of urban life have led to urban Chinese youth “laying low,” rejecting the intensive work culture and postponing their work.

The financial stress of living in China is often linked to the country’s extremely high housing prices, due to the reliance of China’s state-owned enterprises on land financing.

Since the late 1980s, land sales have been a major source of revenue for LGs, helping them to fill budget deficits and finance government expenditure. To further raise off-budget funds to stimulate the economy, local government financing vehicles (LGFVs) have been established.

This reliance on land financing has led to skyrocketing house prices and saddled local governments, LGFVs and developers with significant debt, raising the risk of an economic bubble.

To address the high debt levels in the real estate sector, China implemented a “three red lines” policy package in 2020. However, the policy led to defaults by many real estate developers, including Evergrande Group and Country Garden Holdings, fueling the crisis in the real estate sector.

The financial stress on developers has inevitably delayed the completion of housing projects and fueled protests among unpaid construction workers and home buyers across China. As a side effect, the downturn in the real estate sector has also reduced LGs’ land sales revenue, leaving them financially vulnerable.

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