China's economy continues to grow on export dependence, but with the real estate market collapsing and consumption contracting, analysts say deflationary pressure is becoming structurally entrenched. Externally, it posted a record trade surplus, but weak domestic demand and falling asset prices are said to be sapping vitality across the economy.
On the 2nd (local time), Fortune said China met the government's 5% growth target last year on the back of robust exports. The trade surplus is estimated to have reached a record high of $1.19 trillion (about 1,725 trillion won), up 20% from a year earlier. A sharp increase in exports to the European Union (EU), Africa, Latin America, and Southeast Asia had a large impact. Exports rose 5.5%, accounting for about one-third of last year's growth, the highest contribution since 1997.
However, critics say these headline gains mask a slump in domestic demand. Imports increased little due to weak domestic demand and stronger self-sufficiency policies. The growth rate also slowed toward the end of the year. Fourth-quarter gross domestic product (GDP) growth was 4.5% year over year, lower than the third quarter's 4.8%.
Consumption indicators were even weaker. In December last year, retail sales growth rate stayed at 0.9%, far below October's 2.9% and May's 6.4%. Investment in fixed assets briefly picked up early in the year before plunging, and on an annual basis posted the first decline in about 30 years. In particular, real estate investment fell 17.2%, dragging down the overall investment trend.
The slump in the real estate market remains a core burden on China's economy. Four years after the construction downturn began in earnest, unsold or vacant dwellings are estimated at about 80 million units. This is exerting downward pressure on prices and transaction volumes, as well as on new starts and completions. Chinese authorities have said they will move away from the old liability-driven development model, but most assessments see limited potential for a rebound in the short term.
The plunge in real estate prices has also hit consumer sentiment head-on. Since 2021, as dwellings prices underwent a major correction, a significant portion of the asset value built up during the previous upcycle has disappeared. Consumers are cutting expenditure and focusing on hoarding cash, while corporations are holding on by lowering wages, employment, and prices. In the process, the contraction in consumption is feeding back into falling prices, creating a vicious cycle.
In fact, China has been stuck in a deflationary phase for an extended period. Consumer prices are flat, and producer prices continue to fall. Analysts say excess production capacity and manufacturing-centric policies are deepening oversupply and adding to downward pressure on prices. Some say this is the longest deflationary period since the shift to a market economy.
Experts note the limits of export-led growth are becoming clearer. With domestic demand not reviving, the only outlet for Chinese corporations is to expand exports, but that is likely to intensify global trade friction. Major economies including the European Union (EU), India, and Indonesia have already responded by imposing tariffs on some Chinese products.
The International Monetary Fund (IMF) also warned that China's economy is too large to be supported by exports alone. It said continued export dependence could further heighten global trade tensions. In markets, concerns are growing that if China fails to restructure its economy, low growth and deflation could persist for a long time.