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September 2023

China’s Disappointing Economic Figures and the Crisis of Confidence

François Godement
Special Advisor and Resident Senior Fellow - U.S. and Asia

François Godement is Institut Montaigne’s Special Advisor and Resident Senior Fellow - Asia and America. He is also a Nonresident Senior Fellow of the Carnegie Endowment for International Peace in Washington, D.C., and an external consultant for the Policy Planning Staff of the French Ministry for Europe and Foreign Affairs.

The current breakdown in the Chinese economy, so frequently discussed lately, is not really a breakdown. Beyond the excessive optimism that followed the lifting of Covid-19 restrictions, China's crisis is more insidious: it is based on a loss of confidence on the part of many players, from Chinese consumers and borrowers to foreign investors. What's more, in stark contrast to other economies, China is facing a lack of inflation, huge trade surpluses that cannot grow indefinitely, and a slowdown in consumption. In parallel, the idea of a balance sheet recession with a deflationary spiral is gradually gaining ground.

How is the Chinese government responding to those challenges? Firstly, by rolling out support measures and issuing reassuring statements to Chinese and foreign companies, without ever taking its focus off economic security. However, these various measures and statements have been met with little enthusiasm from households and businesses alike. Adding to this growing skepticism about official announcements is a growing mistrust of the reliability of the statistics provided. It is futile though to expect China to return to structural reforms and more transparent data, as the outcome could undermine the power of the CCP. On the other hand, the largely domestic nature of China's indebtedness and the size of its foreign exchange reserves would allow a bold policy of debt monetization to restore confidence.

Based on an analysis of Chinese-language sources and economists' commentaries, this explainer paints a nuanced picture of the health of the Chinese economy. It also draws lessons for China's economic partners, primarily in Europe. No matter what happens, the backdrop will remain the same for China's leaders: the search for a compromise between stability and competitiveness.

Some sections of this explainer may slightly differ from the original French version as they have been updated with more recent data. This explainer is part of a series of publications on China's economy:

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