IN 1978, the Chinese GDP was $293.6 bn in comparison to India's $293.2 bn and USA's $2351 bn (macro-trends). Once China opened up its economy in the same year and started the reform process, it became the most quoted economic success story of the globe. Over the years, more than half the population would be lifted out of severe poverty and in 2022 China's GDP would stand a tall $18 tn, next only to USA at $25.5 tn (Statista).

This would happen inspite of the zero covid policy during the pandemic. But that is long over, yet the brakes on the economy remain.

Chinese economy grew at only 3.2% in the second quarter of 2023 as against 6% for USA. The worst real estate crisis is exploding, exports and consumer spending have fallen. While the world battles inflation, China is looking at stagflation, an even more deadly economic virus. In July 2023, the monthly inflation rate in China was -0.3%.

Somehow, muted whispers point to policy blunders, with the buck stopping at President Xi Jinping.

During the global crisis of 2007-09, China provided enough stimulus to restart growth, even though it meant greater indebtedness. Today, President Xi has ordained that deficit is not to go beyond 3% of GDP. This implies that a similar policy stimulus is out of the question, any rescue of the real estate sector is ruled out, as are any needed monetary benefits to the underprivileged.

The Chinese central bank has lowered its interest rates by only 0.1% or 10 basis points; from 3.55% to 3.45%. Such a 'reduction' is by no means enough to stimulate growth or to avert a possible deflationary scenario.

This is only one of the many 'policy fumbles' that have brought China to this situation. Firstly, the aggressive foreign policy has caused tensions with almost all neighbours, be it India, Vietnam, South Korea, Japan, Taiwan or Philippines. China has somehow managed to involve USA also in economic conflicts, a scenario that could have been easily avoided. All this has costs.

Clashes with the west have ensured that foreign investment in China for 2022 was $180.17bn, a 47.64% decline since 2021 (Macro Trends). Internally, signs of contagion in the real estate sector were staring for two years. Somehow, not enough was done to avoid the crash. Since last 3 years, regulators have been cracking down on successful consumer technology businesses. This has created further fear. Further, the west was content with China and Taiwan being the global caterers of silicon chips. Now, the west, as are countries like India, investing heavily into chip making. It is only a matter of time before the monopoly is broken.

Whereas President Xi's objectives of making China greater are well intentioned, nationally at least, yet he does not seem to learn even midway. For example, the zero covid policy could have been halted much before it caused extensive economic damage. Today, the first signs of stagnation have emerged. In a situation of a full-blown stagflation, debts will rise and beating the situation will require many sacrifices.

The Economist states that President Xi may have made a fatal error. He has been replacing domain experts with loyalists, especially at the top order. Important analysts are only speaking about economic optimism without the backing of data.

As per BBC reports, in June, China's jobless rate for 16 to 24 year olds in urban areas hit a record high of more than 20%, prompting China to stop publishing such unemployment data. It is rumoured that decisions are now increasingly governed by an ideology that fuses a left-wing suspicion of rich entrepreneurs with a right-wing reluctance to hand money to the idle poor (The Economist) . China's problems seem to have its genesis at the top.

China's Trusts,are vital kegs in the economic scene as they channel funds from investors to infrastructure, property and other entrepreneurship. During China's years of economic miracles, trusts and their investors flourished, with investment products often offering impressive annual returns. Today, policies have, in part made trusts unreliable. Xinhua trust, a Chinese shadow lender has gone under. Zhongrong, the largest trust is on the verge of following suit. Failed property investments are seen as one of the culprits. China's trust industry handles funds of 21trn yuan as per the Economist and were these to fall prey to contagion, it would spell deeper trouble. Official investigations into trusts are underway and this does not inspire entrepreneur confidence either.

The future as they say can bring about many surprises. India and the West once thought that deeper trade engagement with China would boost democracy and openness there. The reverse has happened.

In the present scenario, there could be surprises too. However, President Xi, it seems may not have many options if the current picture continues.

(Disclaimer: The views expressed are the author's own).