China is grappling with the challenges of a deflationary environment that has exacerbated difficulties in people’s livelihoods, characterized by widespread unemployment and salary reductions. Three years of pandemic-related disruptions and the stringent Zero-COVID policy contributed to depleting China’s national treasury. Compounding these challenges, the Chinese Communist Party’s (CCP) perceived threat to the world order has led Western nations to disengage, causing a loss of two crucial pillars for China’s economy: export earnings and foreign capital infusion. In a New Year address on the final day of 2023, the leader of the CCP openly acknowledged China’s economic challenges, stating, “Some enterprises are under operational pressure, and some people face difficulties in employment and daily living.” Hours before this address, the latest data revealed a contraction in the Chinese manufacturing sector, with the Purchasing Managers’ Index (PMI) for December 2023 registering 49, marking the third consecutive month of contraction. The PMI figures for October and November were 49.5 and 49.4, respectively. Two weeks before this, data from China’s National Bureau of Statistics indicated a year-on-year decrease of 0.5 percent in the Consumer Price Index (CPI) for November, surpassing the 0.2 percent decline in October. The Producer Price Index (PPI) for November saw a 3.0 percent drop, worsening compared to the 2.6 percent decline in October, signaling a continuous deepening of China’s deflation. While the global economy grapples with inflation—seen in the United States with a peak of 7.0 percent in 2021 and subsequent declines following rate hikes—China stands in stark contrast, experiencing a troubling phase of deflation. Drawing on a traditional Chinese medicine metaphor, Mr. Wang remarked about the lasting effects of the pandemic. He emphasized that certain business opportunities have been permanently lost, and the economic landscape is far from one where opportunities easily come and go due to the intricate nature of the economic system. He highlighted the consequences of the pandemic on the streets, where numerous businesses, including bank branches, have closed. The widespread availability of storefronts for rent indicates the struggles physical businesses face, with consumer habits shifting dramatically towards online platforms for various goods and services. Official data from January to April 2023 revealed a staggering 20.6 percent year-on-year decrease in the total profit of large-scale industrial enterprises nationwide, amounting to approximately $287.2 billion. Private enterprises, particularly in regions like the Yangtze River Delta and the Pearl River Delta, experienced closures, challenging China’s long-held status as the “world’s factory.” Simultaneously, the real estate industry’s collapse, coupled with these economic challenges, has led to reports of increased unemployment and salary reductions. In June 2023, the official data from the CCP indicated a record-breaking 21.3 percent unemployment rate for Chinese youth aged 16 to 24, prompting China’s National Bureau of Statistics to halt the release of further unemployment data. The phrase “If you can’t find a job, go drive for Didi” has gained popularity as a reflection of the economic hardships, with over 1.2 million licensed ride-hailing drivers added in China by October 2023. “China is now talking about decoupling, right? ‘We want self-reliance, we want to struggle hard.’ Translated into plain language, it means we’re closing our doors and doing things on our own—if the United States and Europe don’t want to engage with us, we’ll do things on our own,” Mr. Wang said. “As a result, a bunch of problems are exposed—interest rates are continuously declining, real estate companies are going bankrupt, the funding chain is breaking, and college graduates can’t find jobs.” Upon the CCP’s entry into the World Trade Organization (WTO), it committed to signing a subsidiary agreement regarding government procurement. However, it reneged on this commitment, directing its considerable national purchasing power toward state-owned industries and continuing subsidies. Simultaneously, Chinese companies engaged in intellectual property theft from Western counterparts, allowing them to expand and compete globally, often with government support. Upon recognizing these practices, the United States reached a breaking point. In August 2020, then-President Donald Trump proposed the idea of decoupling economic ties with China, a sentiment continued by his successor, President Joe Biden, who implemented new rules restricting U.S. investments in specific Chinese industries. Data supports that a steady process of decoupling is ongoing, with China’s share of U.S. imports decreasing from 21.6 percent in 2017 to 16.3 percent in 2022. Strategic commodities’ share has seen an even more significant decline, dropping from 36.8 percent in 2017 to 23.1 percent in 2022. Other countries, such as Vietnam, Taiwan, Canada, Mexico, India, and South Korea, have seen increased market share in the United States, while China’s share has decreased by 5.3 percentage points. American companies are also relocating out of China. Intel is considering moving manufacturing operations to comply with U.S. regulations, Microsoft is contemplating a shift to Europe, and Dell plans to move operations to Vietnam and Mexico. Apple has already moved factories within its supply chain to Vietnam, with suppliers like Foxconn expanding production facilities there. Foreign capital withdrawal has contributed to significant unemployment in China. Data from China’s National Bureau of Statistics at the end of 2023 revealed a three-month contraction in the manufacturing sector. This contraction, coupled with factory closures, has led to increased unemployment and salary reductions, further eroding consumer purchasing power. The CCP finds itself caught in a challenging deflation cycle, struggling to break free from the economic challenges it faces.

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