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1 [1] (September 27, 2023)

handle is hein.crs/govemzm0001 and id is 1 raw text is: Congressional Research Service hnforrming thf legIltve debate since 1914 China's Economy: Current Trends and Issues In 2023, the People's Republic of China (PRC or China) emerged from two years of zero-COVID policies that significantly curtailed its domestic and global economic activity. Weak domestic demand, a decline in domestic and foreign confidence in China's market, and persistent systemic debt pressures, particularly in the property market, continue to constrain the government's efforts to jumpstart growth. In 2022, China relied on investment and exports to achieve a gross domestic product (GDP) growth rate of 3%, well below initial government and international projections. Many economists contend that China will experience similar growth rates going forward as the economic returns of China's traditional growth model diminish and as the economy faces other constraints, such as an aging population. The government is targeting 5% GDP growth in 2023. The International Monetary Fund (IMF) projects that China's economy could grow by 4.5% to 5% in 2023, particularly if Beijing were to adopt economic reforms and stimulus measures that could increase domestic consumption. Figure I. Composition of China's Economy 80 o GD cir C pi p Fomto Trwd Source: CRS with data from the World Bank and China's National Bureau of Statistics (NBS). Note: Gross capital formation consists of outlays on additions to the fixed assets of the economy plus net changes in inventories levels. Efforts to Boost and Rebalance Growth PRC leaders have been reluctant to adopt major economic stimulus measures to boost falling household consumption as they try to deleverage the economy, reduce debt levels, and contain market risks (Figure I). In 2022, the PRC government used targeted measures to boost growth such as value added tax (VAT) rebates for exports and tax incentives for research and technology. In 2023, the government has sought narrow efforts to boost domestic consumption and confidence in China's private sector. In July 2023, the government announced consumer financing for purchases of electric vehicles (EVs) and consumer electronics, sectors facing overcapacity. China's economic planning agency concurrently announced opportunities for private firms to invest in transportation, clean energy, infrastructure, advanced manufacturing, and agricultural projects. These efforts may prove insufficient to expand domestic demand, and, if economic sluggishness continues, Updated September 27, 2023 the government may be forced to resort to bolder support measures before the end of 2023. Systemi Economic Challenges China faces economic challenges that predate the pandemic, including slowing domestic growth, rising labor costs, trade pressures including U.S. tariffs, consumer uncertainty, and rising corporate and government debt levels. China's total non-financial debt-household, corporate, and government-reached 297% of GDP in 2022 (Figure 2), with most debt held by private firms and provincial and local governments. China's strict zero-COVID lockdowns exacerbated these issues. Local governments and firms have relied heavily on debt (bank loans and bond issuances) to spur economic activity via fixed-asset investment as consumer spending has lagged. Data from the People's Bank of China indicates that bank loan issuance rose 8.8% year-on-year in August 2023, and China's central government finalized plans to allow local governments to issue special-purpose bonds totaling approximately RMB 3.8 trillion ($519 billion) in September 2023. Figure 2. Nonfinancial Debt as Share of China's GDP 2006 2OOS 2010 2012 2014 2015 2018 2020 2022 w Househo ds aCorporae G cernrmenr- Source: CRS with data from the Bank for International Settlements. Notes: *Government debt in nominal value. Comparable U.S. debt was 255.6% of GDP in 2022. In 2016, the PRC government initiated a campaign to rein in debt accrued by banks, local governments, and unauthorized lending. The effort included scrutiny of overseas investments and curtailment of certain state firms such as HNA Group. The government restructured these firms' debt and aligned investments with state goals, established state trusteeship, and transferred assets to state investors. In 2018, Xi Jinping pledged to tackle financial risk as one of three tough battles. The campaign led to several bank bailouts in 2019, but defaults fell in 2020 due to pandemic stimulus and laxer rules. Local government balance sheets further deteriorated with the burden of pandemic mitigation efforts and initial stimulus programs falling almost entirely on local governments. As local and provincial fiscal conditions worsened, China faced a series of defaults by its major property developers tied to local governments, most notably China Evergrande Group and Country Garden. Income from property sales is a %at GDP :era I