2021’s Impact on China’s Economy

China’s GDP officially grew 4% in the fourth quarter of 2021. This is an excellent GPD growth rate by global standards but is a small fraction of growth compared to earlier in the year. Even if their GDP growth rate is real, it’s a sharp slowdown vs only a few months ago. China has a history of overinflating its GPD growth and won’t release information about its economy that they deem sensitive.

China had a stunning total 8.1% GPD growth rate in 2021 but growth has been uneven. The 8.1% is above Beijing’s official growth target of 6% for the year and is well over the 2.2% that the Chinese economy grew in 2020. The economy grew at an impressive 12.7% in the first half of 2021 but declined to a 4.0% GDP growth rate in the last quarter of the year. If China’s economy does not grow substantially in the first half of the year in 2022, it could indicate a wider problem with their economy.

Even though a 4% growth rate is still high by conventional standards, it’s still a drop from the 12.7% growth rate seen just a few months earlier. One reason for the sharp slowdown would be the government’s crackdown on several sectors of the economy.

If these crackdowns continue, it could be an indication of impeding growth for a longer period of time as China tries to reign in certain sectors of the economy. China’s economy is facing several headwinds while it’s also trying to cope with the effects of the pandemic and external politics.

China has been immune to the trap that most developing countries fall into as they grow from developing economies into developed economies. Countries develop rapidly but so quickly that their currency devaluates or they raise interest rates to cool off their economy. This causes a multiplier effect that ripples through their economy and impedes growth. China has been the rare exception by experiencing exponential growth and a stable currency. China has effectively pegged its currency, the RMB (Yuan), to the USD and has kept the economy stable thought out the past decade. There has been very little expected variation between the USD and the RMB since China entered the WTO in 2001.

China’s economy has boomed since it entered the WTO and has seen substantial growth in all aspects of its economy. Growth in several sectors including real estate, manufacturing, and technology has outpaced every economy in the world. China’s economy is a powerhouse by any measure. It’s the world’s largest manufacturer, produces 90% of refined rare earth minerals, has a thriving film industry, and it can wield massive economic power with its state-owned companies. 

China’s economy has remained stable through Xi’s anti-corruption crackdown, Covid, crackdowns on the EdTech industry, the larger Tech industry, and external political factors. But these factors should have taken a toll on the Chinese economy by impeding growth or causing other signals that China is heading for a larger slowdown of its economy.

In this article we will look at the effects the crackdowns are having on the Chinese economy and how that will affect GDP growth in the future.


Manufacturing in China defied gravity over the past few years as it faces several headwinds since the pandemic began. The sector seemed impervious to America’s tariffs as lower-end manufacturing moved to other parts of Asia, but higher-end manufacturing continued to keep the sector from declining.

China’s manufacturing was also able to make it through pandemic without missing a beat. China employed harsh lockdown protocols on its economy in 2020 to avoid the effects of the Covid virus. The Caixin Manufacturing Index dropped to 40 in 2020 during the pandemic but bounced back quickly. China’s current Caixin Manufacturing PMI rose to 50.9 in December which remains just above the line for expansion and contraction. The 50 mark separates expansion from contraction. Since the early part of the pandemic, manufacturing has mostly stayed in expansion territory and continues to climb in China.

Manufacturing can be cyclical in China due to the Lunar New Year when workers leave their cities to return to the countryside and see family. The pandemic came at an opportune time in February of 2020 when workers were set to return home. This allowed China to avoid the worst economic impacts on its economy as it shut down the country in February of 2020.

Manufacturing has continued to expand even as commodity prices and labor prices have raised the cost of production. Energy prices have skyrocketed which drives up the price of plastics. Labor costs in China have been rising since the beginning of the pandemic. These factors push up manufacturing costs which American companies would either transfer to the manufacturers or to the consumer. Inflation has been rising in the US, but companies cannot raise prices by real inflation numbers. If they did, consumers would boycott their products. Therefore, companies likely absorbed some of the costs and passed other costs onto manufacturers. This impact has likely hurt the manufacturing industry in China as manufacturers struggle to remain profitable.

Manufacturing struggled over 2021 with supply chain issues and high commodity prices impacting production. Costs to ship TEUs across the Pacific have risen from approximately $2,000 to near $20,000. This has been driven by ships moored off the California coast for weeks and the lack of cargo containers.

American ports cannot handle the sheer number of TEUs that need to be imported and exported from American ports. Currently, America’s largest export to China is air because we are just sending back empty TEUs when we even have the capacity to load them on ships. These cargo containers are either being stacked up in fields in the US or are being held offshore for weeks while waiting to be unloaded.

If American companies cannot get their goods to market on time, they may diversify away from China to a country that has less strict Covid measures. (If Hobby Lobby cannot get Christmas decorations until December 26th, it would not make sense to make those goods in China)

The pandemic hit the economy at the same time the RMB was gaining strength on the FX market. A stronger currency makes exports more expensive and imports less expensive. The RMB has been gaining strength against the dollar since the pandemic began. Eventually, international manufacturers will move away from China to lower-cost countries if the RMB gets too strong. If international manufacturers have to deal with supply issues due to China’s “Zero Covid” policy, it will force them to diversify their supply chain even more than they already have in the past.

International manufacturers enjoy their relationship with the Chinese Communist Party because they can place an order and the Chinese will build a plant just to fulfill that order. They will do this just in case the manufacturer wants to place additional orders for more products. Even if places like India or Vietnam are cheaper, manufacturers still enjoy their relationship with the Chinese government because the process is seamless.

Manufacturing accounts for approximately 26% of the economy in China. If the sector comes to a complete halt, it has a devastating impact on the economy. China continues to have strict quarantines to avoid even the smallest number of cases. These policies hurt demand for goods in China as more people stay home and consumption decreases. These constant shutdowns will have a long-term impact on China’s manufacturing process which will Impact China’s GPD growth rate.

Birth Rate

China’s obsession with quarantining its population is likely due to the fact that the country’s population growth rate has peaked. Birth rates reached an all-time low of 10.62 million in 2021 which is just barely above China’s 10.14 million deaths. The birth rate dropped by nearly 1.5 million births from 2020, which means that its population will likely remain at 1.413 billion before it declines over the next few decades.

This is China’s Baby Boomer moment and will likely lead to challenges that America is currently facing. China may be able to solve this problem by letting Covid decimate the elderly population but will expose China’s woefully inadequate healthcare system.

Another problem with letting Covid decimate the country is that it will reduce potential consumers and would therefore reduce China’s GDP. This is a long-term issue for China as fewer people will mean fewer consumers just as China tries to switch from a manufacturing economy to a services economy. China’s image is built around the exponential growth of its GDP which is why it’s critical that the CCP does everything it possibly can to raise its population.

China has been trying to stimulate its birth rate for the last few years by switching from a 1-child-policy to a 3-child-policy. This has come on the back of forced abortions, sterilizing women throughout the country, concentration camps for its Muslim community, and local officials forcing women to keep the population low.

The country has seen little success in boosting its birthrate and will likely continue to see its population decline just as the number of elderly citizens rises.

Tech Industry

China’s tech industry has been struggling in recent months as the country clamps down on tech moguls to secure the power of the Chinese Communist Party. Currently, China’s tech industry makes up approximately 8% of the GDP growth rate. This sector is declining as the CCP cracks down on tech companies which drives vulnerable stocks lower. As major tech companies see their stocks go from massive growth stocks to underperformers, China will see its growth rate stumble.

Jack Ma, who founded Alibaba and Ant Group, disappeared from public for months after China launched an investigation into the richest man in China. Ma created Alipay which is an app that allows users to make payments by phone. This makes cash obsolete in China and challenges the power of the CCP. It also has the potential to illustrate through GDP growth rate in times of stress. Something the CCP likes to maintain as a state secret.

Alipay was spun off into Ant Financial which was gearing up to launch an IPO which would expand its financial footprint.  The Chinese government suspended the IPO, began an investigation into Jack Ma, and disappeared Ma from public view.

Alibaba and the associated Ant Group were not the only tech companies that have been affected by China’s crackdown on the tech industry. Other companies in the tech industry have seen their stocks on Hong Kong’s Hang Seng plummet.

Meituan, Didi Global, Weibo Corp, Baidu, JD, Bilibili, Kuaishou Technology, ByteDance are just a few tech companies that are struggling in this current environment. The companies have seen their stocks pummeled while the Chinese government attempts to regain control of a powerful sector. Stocks have begun to recover since the crackdown in mid-2021 but will likely have more government control over the industry in the future. Greater government control will ensure these once high-flying stocks are on their way to turning into penny stocks.

Chinese regulators announced new rules restricting investment in tech companies and then backtracked on their statement. Even if the CCP does not officially enforce this rule, it’s clear that President Xi intends to wrestle back control of the industry. China is worried that these tech companies will flex their independence similar to how the tech companies in the United States operate. An independent and well-funded industry is a threat to the Chinese Communist Party and would be disastrous for President Xi. President Xi is intent on reigning in this sector of the economy even if it means crippling the overall economy.

Education Industry

Startups that specialize in after-school tutoring help students study English and other subjects to propel them past their peers. These schools cost a small fortune for middle-class families that struggle to put their children in these schools. These schools are unaffordable for many families but it’s the only way out of poverty for many families in China. If their children do not study at these schools, then they may do worse on their exams which will set them back for their entire lives.

The EdTech industry employs western teachers that work outside the prevue of the Chinese Communist Party. This industry raised billions of dollars as they strived to help students get better grades and prepare them for the gaokao exam. The Gaokao exam is similar to the SATs and students study their entire lives to do well on this test.

Beijing has shut down this industry, confiscated these schools, fired the western teachers, and turned them into public institutions. This allows the government to fully control the spread of information, make these institutions cheaper for middle-class families, and stifle creative thinking that could someday challenge the government.

These schools taught middle-class children English and western culture for decades. Parents in China believe it is critical for their children to learn English and to adopt more western-style thinking that would allow them to be more creative. This type of thinking could also be beneficial if their children move to Europe or America in the future.

These western style cram schools were beneficial for students’ academics but often kept them at school until 8 pm. Now that these schools are gone, students will have more free time and parents will be able to save more money. Even though they will have more free time, their thinking and communication skills may suffer.

Public schools do not foster creative thinking and struggle to allow students to have any contact with their teachers at all throughout the school year. The number of students ranges from 50 to 100+ in a single classroom in several parts of China. These schools enforce strict behavior controls while allowing very few creative outlets.

Students and teachers were quick to praise the crackdown, at least publicly. Students in China spend their entire childhood studying for the gaokao exam and there is a lot of pressure on students to perform well on this test as it will determine if they can go to college and live a good life. This policy change is also cheaper for the parents who spend every penny they can try to give their children have the best education possible.

With these schools gone, children in China will be able to study less in a stress-free environment and parents may have more children because they will not need to pay for cram schools. This is the CCP’s thinking as they crack down on these schools. Preventing western-style education, reducing study time for students, and saving the parents money are all wins as they shut this sector of the economy down.

But this will have a greater impact on the overall economy as the government takes over private businesses. International companies may be less likely to invest in the country if they know the CCP will just take over their business. This pullback may hurt China’s GPD growth rate in the future.

Property Industry

China’s real estate industry makes up approximately 1/3 of China’s GDP and the effect of this sector of the economy is felt across the entire economy. The real estate industry is critical to the economy as many Chinese investors put their money into second and third homes rather than the stock market. These tangible assets represent the wealth of a vast range of Chinese society.

The stock market is relatively new in China, so investors choose to put their money into something more stable. The real estate market is also critical because Chinese men need to buy a home before they can get married so this makes property a critical asset in the country. This is why it’s confounding that the property market would meltdown in the country if the economy is growing at the official rate of over 8% per year in 2021.

One explanation for the slowdown in the real estate market is that property developers have developed substantial amounts of first and second-tier cities. This has pushed those developers too away from the center of many cities for middle-class buyers. This led local governments to push property developers to build too much inventory to make up for a loss in revenue.

Local Chinese governments receive very little money from the Chinese federal government. The cities generate revenue by selling land that was appropriated by the CCP around the city to property developers. These property developers buy this land and develop the property. Many first-tier cities have vigorously developed this land. This led to property developers moving further from the city center where residents are less likely to buy homes. These areas have less appeal which leads to “Ghost Cities” where property developers cannot find a single buyer for an entire neighborhood.

Developers have begun to develop second-tier cities as manufacturing has moved inland. This cycle has been repeating itself all over the country and prices have finally begun to lead to a decline in the industry. When the property prices drop, so does revenue for the city and local governments. It also means that many Chinese citizens will lose their investment in their second home.

Another explanation for lower home prices is that the real GDP might not be growing as fast as official GDP estimates. The Coronavirus, clampdowns on the tech industry, manufacturers dealing with high commodity and labor prices, and international companies diversifying away from China might have taken a toll on the country. This could mean that the property developers’ troubles are a sign of a larger issue in the Chinese economy.

Recently, property developers have had trouble repaying their current debt which is denominated in both RMB and USD. The WSJ reports that January sales have contracted anywhere from 10-80% for developers in China. Overall, they saw a YoY drop of 40% in January which has led to vast properties not being developed in China and around the world. Vast apartment buildings across China are left unfinished or are being given to construction workers for their labor. The contagion of the real estate industry is even impacting the US as skyscrapers are left unfinished.

Evergrande Group’s troubles shook the property market in China in 2021 causing a widespread contagion throughout the Chinese economy. Evergrande has more than $300 billion in liabilities and first struggled to repay its bond payments back in September of 2021. It tried to renegotiate some of its debt before reaching out to the Chinese government for help. After the federal government declined to help, it defaulted on its bonds at the end of 2021. The group needs to deliver the vast number of pre-sold homes but refuses to sell assets cheaply even as it tries to renegotiate its debt. The company will struggle in the future because work has not resumed back to normal as it struggles to pay its suppliers and buildings sit half-finished.

But Evergrande is not the only Chinese property developer struggling in this current environment. Chinese property developers like E-House, Greenland Holdings, Modern Land, Country Garden Holdings, Zhenro Properties Group, Sunac, China Aoyuan Group, and Fantasia Holdings Group have been hit hard by the collapse of the Chinese housing market.  These companies have seen their stock on the Hong Kong Hang Seng Mainland Property Index collapse and look set to deal with low prices and high levels of debt for at least the next year.

This 2008 style financial crisis will have a multiplier effect throughout the rest of the economy. It is hard to imagine how the economy can continue to grow at Beijing’s official target when one of the most important sectors of the economy flounder. This sector should be dragging GPD lower as well as leaving the average Chinese citizen nowhere to invest their money.


China is currently walking a tightrope between Russia and the West, and this rope continues to get smaller. China wants to support its ally Russia due to political and economic reasons. China is a major importer of Russian natural gas, crude, technology, and agricultural products. Russia is also a major purchaser of Chinese products. But their relationship goes far beyond a simple economic relationship. The two countries have formed the Shanghai Cooperation Organization, China’s answer to NATO. They also help their allies Iran and Venezuela skirt US sanctions, cooperate with the UN Security Council, and hold war games.

While Russia and China continue to develop their bonds, Russia’s current situation in Europe is testing this relationship. Europe is finally faced with a Russian invasion of a country in Europe. Several EU countries were already shaken by Russia’s previous provocations. Countries like Poland, Estonia, and Lithuania were already vocal about the threat of their neighbor before the Russian invasion. The situation in the Ukraine has amplified those fears and may lead to sanctions on China.

The EU is led by its de facto leader, Germany. Germany has not given much credence to Eastern Europe’s fears of a large-scale Russian invasion in Eastern Europe. This has allowed Germany to establish a remarkable economic relationship with Russia while importing vast amounts of natural gas and petrol chemical materials. But the situation may finally be pushing Germany to act against Russia as bombs drop all over the Ukraine.

The UK and US have led sanctions against Russian banks and debt but it’s unclear how many companies will get sanction waivers. This may collapse their currency which will make it difficult to conduct trade with its satellites and China. China has essentially pegged its RMB to the dollar through its dealings with Hong Kong after China took back the city from the British in the 1990s. The Chinese government does all of its international business through Hong Kong due to its role as an international city and its currency pegged to the USD. The HKD was pegged to the USD after Hong Kong was given back to China and local residents feared a takeover of the city-state.

If the West rolls out real sanctions against Russia due to its invasion of the Ukraine this could complicate Beijing’s economic ties with the EU and the US. China seems content in sending fentanyl and meth precursors, stealing intellectual property, skirting US sanctions on Iran and Venezuela, and claiming international territory in the South Chinese Sea as well as in Korea and Japan.

But China has not sanction-proofed its economy as Russia has done. Russia has beefed up its production of natural gas and crude oil to support its economy. It has also been producing massive amounts of gold and platinum and shoring up its substantial FX reserves while lowering its outstanding debt.

China is the largest gold producer on Earth, but its economy is uniquely tied to the US and Europe. China is an export-dependent economy that would be decimated if the US sanctions its financial institutions and manufacturers. China’s banks would collapse, property developers would go bankrupt, and agricultural imports would decline as its true GDP growth rate declined. This could happen even if the west did not impose sanctions as international companies tried to diversity away from China.

Chairman of Everything

President Xi came to power as the Chairman of the Chinese Communist Party. He quickly led a widespread crackdown on “corruption” that removed dissidents and rival factions from power. This allowed him to quickly shape the CCP’s inner circle that made critical decisions throughout the country. This consolidation of power has only grown since Xi’s time in office where he has become the most powerful leader since Deng Xiaoping in the 1980s.

He has stepped up surveillance on the country’s 1.4 billion citizens, cracked down on the Muslim residents in the West, expanded the military, and has even given himself the option to run for an infinite number of terms as Chairman.

Usually, Chinese leaders only have two 5 year terms but Xi bucked that trend and now has the power to rule China for life. The winter Olympics might as well have been a coronation for Xi’s 3rd term at Beijing’s 20th National Congress of the CCP later this year as he continues to consolidate power throughout the country.

President Xi will likely extend his power for years to come as he continues to shape the country in his image. He will likely continue to reduce poverty, reduce dissidents within the CCP, expand the economy, and inflate the military’s prowess.

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