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  May 10, 2023 2:24 AM EDT

  Analysis: China’s 2023 economic outlook

  Machinery is used to load and unload containers at the China-Kazakhstan Logistics Cooperation Base in Lianyungang city, Jiangsu province, China, 23 November 2022.To get more latest china economy news, you can visit shine news official website.
  China's economy could face some of its starkest challenges in years amid a wavering global economy and major changes in the country's financial system.

  Businesses in the country are navigating the continued effects of COVID-19, as well as government reforms to the credit market. Consumers' confidence in the country's property market has been shaken, and, separately, businesses face a restricted flow of money to power their expansion.

  In response, business leaders report that they're preparing for an unknown period of slower growth — in contrast to the economic boom that has defined the country's economy for many years.

  The country faces "lower incomes, reduced employment prospects, reduced spending power, and lower property values", said Logan Wright, a partner and director of China Markets Research at Rhodium Group.

  Wright, who returned to the US recently after decades in China, said that it's all but impossible to make predictions about the country's growth rate in the year ahead.

  "We're in the midst of a pretty dramatic adjustment, not only in the property sector and the export sector, but also from the slowdown in credit growth," he said.China's economic growth in the 2010s was fuelled in large part by rapid increases in lending, especially through "shadow" forms of credit, according to Wright. Shadow banking is the management of credit outside of the formal banking system and its regulations. Instead of offering traditional loans through a bank, a bank might route transactions through third parties in order to avoid regulations and costs while providing capital for growing businesses. Alternatively, businesses in search of capital might turn to nonbank organisations, according to the Brookings Institution.

  These less-closely regulated loans "essentially allowed the financial system to serve as a shock absorber for the economic system and the political system", Wright said. "In many ways, the financial system grew so rapidly precisely to offset some of the weakness in the domestic economy and to prevent that weakness from materialising earlier in China's development."

  But embracing these forms of finance led to increased volatility and instability, and China's government responded in 2016 with tighter monetary and regulatory controls, Wright said.

  Years later, the effects of increased regulation are still playing out. "Because the shadow banking system was so much larger than Beijing had anticipated, the crackdown and the slowdown in credit had a big impact on the economy," Wright explained.

  The decline in the availability of credit has increasingly affected the economy. First, smaller banks defaulted on their obligations, which led to a greater aversion to risk amongst other lenders. The defaults spread to corporate bonds in 2020, followed by property developers in 2021.

  As developers have run into money problems, their work on residential projects has stalled — leaving buyers on the hook and scaring off potential buyers. Land sales dropped by nearly 50% in the first half of 2022, compared to a year earlier, and construction has slowed, too. As in other countries, that's likely to affect other parts of the economy as demand for material and services falls.

  "In 2023, what I think is under-appreciated is that the property market is certainly going to continue to decline — a very meaningful drag on growth," Wright said. "We don't really know what demand looks like in the absence of investment-driven demand. And, fundamentally, there's just less demand among owner-occupiers going forward."

  That's compounded further by declines in China's working-age population, leading to expectations that the country's population is beginning a broader decline, as a researcher wrote for the World Economic Forum website.