In the verge of 2024 coming to an end, American economist Huang Dawei recently had an exclusive interview with Dajiyuan, analyzing the reasons behind the “internal and external concerns” of China’s economy in 2024. He predicted a more perilous path for China’s economy in 2025, believing that “Black Swans” and “Gray Rhinos” exist in at least six aspects.
Economic downturn, debt, unemployment, closures, and downgrading of consumption became the hot topics of China’s economy in 2024.
Huang Dawei mentioned to Dajiyuan that the domestic economic structure of China has been persistently upholding the concept of “national advancement and retreat of the people” in recent years. State-owned enterprises lack vitality while private enterprises are dynamic but continuously under pressure. Simultaneously, in a global perspective, China’s major profitable markets, the EU and the US, have increasingly tense economic and trade relationships with China. The Russia-Ukraine war has also led to more companies beginning to choose sides in the market, not necessarily aligning with China. Therefore, the economic situation in China is very pessimistic.
Amid the economic downturn and rising social discontent, the Chinese authorities finally decided to introduce a package of “incremental policy tools” in late September 2024, which almost failed to help families or stimulate demand. Most financial support flowed towards local governments. The Chinese stock market experienced a brief uptrend in December but quickly turned downward.
During the Central Economic Work Conference in early December 2024, the Chinese leadership once again pledged to provide more fiscal and monetary policy support, but the market remained skeptical.
State-owned banks and other financial institutions in China have been aggressively purchasing low-risk domestic government bonds, causing a significant drop in bond yields.
Huang Dawei suggested that the authorities may introduce more diverse policies to boost the economy, including lowering interest rates, increasing fiscal expenditure, and potentially implementing tax cuts and welfare increases. Additionally, it will be crucial to see if the authorities can improve relations with European and American countries, especially with the US.
“Due to China’s national security law, espionage laws, they are very unfriendly to foreign investments and foreigners, which is not conducive to maintaining a certain position for China in the global economic and trade arena, especially as China is a country highly dependent on exports.”
He believed that without a shift in diplomacy or improvements in intellectual property protection, no matter how the authorities implement stimulating internal policies, it would be impossible to boost the economy. Huang Dawei also mentioned that China might further slide into a more planned economy with a higher percentage in the future.
During the Third Plenary Session of the 20th CPC Central Committee in July 2024, the Chinese authorities emphasized the continuity of strengthening and expanding state-owned enterprises. Recently, state-owned enterprises have set up venture capital funds, with China Railway Fourteenth Group venturing into agriculture.
On the other hand, the Minister of the United Front Work Department, Shi Taifeng, recently urged private sector individuals to maintain “high consistency” in thinking, politics, and actions with the Xi Jinping Central.
Huang Dawei pointed out that according to the laws of human and economic development, China’s planned economy, especially in a bureaucratic system like China’s, where outsiders govern insiders and the management efficiency of the entire bureaucratic system is relatively low, without structural reforms favoring private enterprises and the private economy, China’s economy may face even greater downward pressure, gradually drifting away from the world economy.
“If the Beijing authorities do not reduce burdens, cut taxes, increase social welfare, and halt the national advancement and retreat of the people, giving more market space to private businesses, China’s economic downward pressure would be immense, and there is a possibility of an overall economic crisis.”
Every year-end and early year, observers speculate whether China will face “Black Swans” or already existing “Gray Rhinos” in the new year.
In general, “Black Swans” refer to events that are hard to predict, have a low probability of occurring but have significant impacts once they do, leading to chain reactions of negative consequences; whereas “Gray Rhinos” are familiar risks that, due to insufficient attention, result in severe consequences once they materialize.
Looking ahead to 2025, Huang Dawei outlined 6 possible dimensions in which China might face Black Swans and Gray Rhinos.
“The first, the local crisis in the real estate market might be more severe. Although the Beijing government has taken a series of measures to stabilize the real estate market in recent years, apart from the Pearl River Delta, Yangtze River Delta, and Bohai Bay, most cities in China might face a serious rupture in their real estate markets due to the lack of effective targeted improvement. Issues such as high taxes, unimproved welfare, and lack of administrative capability could lead to a drastic rupture, posing significant risk to the entire economic system, local and household finances.”
“Outside of the Pearl River Delta, Yangtze River Delta, and Bohai Bay, the possibility of a systemic collapse in the real estate market is highly significant,” he emphasized.
Secondly, a further eruption of local government debt and the debt crisis of state-owned enterprises and central enterprises.
Huang Dawei explained that the scale of local government finance in mainland China is enormous, with many local state-owned enterprises and financing platforms facing prominent debt issues, making the situation of shadow banking very complicated. If effective measures are not taken to rescue the situation, the overall local government debt and the debt of local state-owned enterprises could lead to the disruption of funding chains, disrupting the entire local financial market and potentially impacting the entire country.
Thirdly, there will be pressure on the Renminbi exchange rate. Deterioration of the external environment, further decline in domestic confidence, and insufficient foreign confidence in the Chinese economy might lead to a devaluation of the Renminbi.
Huang Dawei stated that while Renminbi devaluation may seem beneficial for exports, it could result in further foreign capital withdrawal. Moreover, Renminbi devaluation would have significant negative impact on the capital market and the entire Chinese economy, weakening economic stability.
“Furthermore, China has always sought to internationalize the Renminbi. With a large amount of Renminbi held overseas, if sold off and converted into USD to deal with ‘Belt and Road’ countries, it would further deplete China’s foreign exchange reserves, posing a highly negative factor for China.”
Fourthly, there will be a major shift in international trade relations.
Huang Dawei analyzed that China’s economy actually doesn’t have three drivers but only one, which is exports. China heavily depends on exports. If global geopolitical risks suddenly escalate, such as China facing sanctions from major trading partners, the US and EU, due to China’s stance on issues related to North Korea and Russia, or sudden aggravations in some geopolitical conflicts, or aggressive foreign policies causing incidents like the previous assassination of a Japanese schoolgirl, these events could drastically deteriorate China’s economic and diplomatic relations with its major trading partners, resulting in a huge blow to China’s international trade, and this situation would be uncontrollable.
“Especially with Trump coming into power, taking a more hawkish view towards the CCP, and being more assertive in his actions, this undoubtedly poses a major hidden risk for Beijing.”
Fifthly, there will be a decoupling in key technology industries.
Huang Dawei stated that developed industrial countries like Europe and the US might take stricter technological blocks against China in critical areas like semiconductors, new energy, and artificial intelligence, potentially leading to disruptions in China’s industrial chains, weakening China’s growth potential in technology. Moreover, as more and more countries dislike China’s technology theft practices and counterfeit issues, their sanctions on China may become increasingly severe.
Sixthly, there may be a major public health event, natural disaster, or industrial disaster.
Regarding industrial disasters, Huang Dawei cited the example of the mass production of so-called new energy vehicles in China, which actually were just electric cars with poor quality control and surplus production, leading to setbacks in the European and American markets. Ultimately, this might result in large-scale failures, causing chaos in the entire supply chain and market.
“Because a lot of money is being wasted in electric cars, solar panels, and wind energy industries, the so-called ‘new qualitative productive forces’ of the three major industries may face sanctions or overcapacity, leading to chaos in the entire supply chain.”
As for major public events, one scenario is China experiencing another large-scale epidemic. Moreover, after undergoing the pandemic, many issues related to adverse effects of Chinese vaccines on various aspects of human health are latent risks. Therefore, it is necessary to monitor for any major public health events related to such issues and their potential significant impact on the overall economy.
Huang Dawei stated that based on recent economic data and policy trends, along with the international situation, he predicted that China would face more challenges in 2025 compared to 2023 and 2024. Potential Black Swans and Gray Rhinos events in the economic arena mostly revolve around local debt, the low efficiency of state-owned enterprises and central enterprises, challenges in the real estate market, exchange rates, tense economic and trade relationships, and hostile diplomatic relations.
“Especially after Trump came to power, with his assertiveness and the repositioning of his discourse influence on the global economy, the collision between China as the largest exporter and the US is inevitable,” he said.