2025 ACJC H2 Prelims Paper 1 CSQ2 Suggested Answers FINAL

© ACJC Economics Department 1 Question 2: Challenges Facing China’s Economy Table 2: China Key Economic and Social Indicators 2019 2020 2021 2022 2023 Nominal GDP Growth (%) 7.8 3.5 12.6 5.1 4.9 Population Growth (%) 0.35 0.24 0.09 -0.01 -0.1 Unemployment Rate (%) 5.2 5.6 5.1 5.5 5.2 Youth1 Unemployment Rate (%) 12 14 14 18 21.3 Inflation Rate (%) 2.9 2.5 1.0 2.0 0.2 Pollution Index (PM2.5 µg/m³) 36 33 30 29 30 Life Expectancy at Birth (years) 77.3 77.9 78.2 77.9 78.6 Source: National Bureau of Statistics of China Extract 5: China’s Overcapacity and Deflationary Pressures China has an industrial overcapacity problem that is rooted in its long -standing investment-led growth strategy. For decades, economic expansion was driven primarily by large -scale investments in heavy industries. State subsidies, often financed by government borrowing, were channelled into strategic industries such as electric vehicles, solar panels, and batteries that led to repeated overbuilding and duplication of production capacity. As a result , China’s economic growth model has long been imbalanced, with policy favouring investment and industrial output over household consumption. These state subsidies incentivised firms to expand aggressively, even in the absence of sufficient domestic demand. Even as many sectors grapple with excess supply, the government continues to focus on its investment-led growth strategy instead of boosting citizens’ incomes and spending. This imbalance has led to excessive production alongside chronically weak domesti c demand, creating fear that there will be eventual deflation. Analysts note that measures are needed to prevent a downward drift in inflation expectations that could undermine business confidence and consumer spending. Economists warn that such a cycle w ould raise real debt burdens and threaten economic growth. The possible threat of 1 Youth refers to those aged 16-24.

© ACJC Economics Department 2 deflation has again “reared its head” in China, and without a rebalancing toward domestic demand, these ultra-low price pressures – and their painful consequences – may persist. Source: Adapted from Reuters, 9 November 2023 Extract 6: China’s Demographic Decline and Youth Unemployment Crisis China’s population is now in decline, ushering in a new demographic era with profound economic implications. The National Bureau of Statistics reported that the population fell by 2.08 million in 2023, a 0.15% drop to 1.409 billion people. This was the second consecutive year of shrinkage – the first time China’s population has declined since 1961. Decades of the one -child policy and rapid urbanisation have left China with one of the world’s lowest fertility rates. At the same time, China is grappling with a job crisis among its youth. Officially, the youth unemployment rate hit a record 21.3% in June 2023 – the highest since the statistic began and a figure so troubling that authorities suspended the release of youth job data thereafter. Several factors underpin this spike in youth unemployment. A primary reason is the general economic slowdown and cautious business sentiment, leading companies to reduce hiring or offer fewer positions. Furthermore, a mismatch exists between the skills of a growing number o f university graduates and the available job market, which is still heavily skewed towards manufacturing and traditional industries, rather than the growing service or high -tech sectors that many graduates are trained for. Meanwhile, the cohort of graduate s has swelled to record numbers, intensifying competition. Faced with a shortage of appealing opportunities, many youths have simply opted out. Some pursue further studies; others retreat into inactivity, exemplified by the popular catchphrases of disillusioned youth such as “tang ping” (“lying flat”) – a rejection of the rat race. The consequences of these demographic and labour trends are far -reaching. China’s working - age population is shrinking just as the burden of supporting a rapidly aging population grows, raising concerns about who will drive the economy and care for the elderly in the coming decades. Moreover, a generation of underemployed youth can become a drag on growth and innovation in the long run. Source: Adapted from Reuters, 17 January 2024 Extract 7: China’s Economic Growth Challenges As China grapples with a slowing economy, the government has been compelled to implement targeted fiscal stimulus such as the national trade -in scheme that offers cash rebates to consumers who swap old home appliances, electric vehicles, electronics such as smartphones, tablets, smartwatches and fitness bands for new ones to support growth. However, these short-term measures have added to already significant levels of public debt. With land sales revenue coll apsing due to the prolonged property market downturn, the government are now struggling to service their debts, prompting fears of bankruptcy. At the same time, households remain cautious in their spending, and private investment is subdued, placing more pressure on the government to maintain stimulus. Yet, analysts warn that continued reliance on

© ACJC Economics Department 3 debt-fuelled growth may prove unsustainable. With rising government debt, it may be harder for the government to respond swiftly and effectively to future economic shocks. Additionally, as more public funds are directed towards servicing debt, fewer resources may be available for long-term investments that could enhance living standards. While the government have acknowledged the need to improve debt management, they are reluctant to adopt strict austerity measures that could undermine fragile economic recovery. This presents a growing dilemma for Chinese policymakers in trying to balance short -term economic recovery with the imperative of long -term fiscal sustainability. On the external front, China is facing significant challenges as well, primarily from intensifying US- China trade tensions. Several rounds of US tariffs and export controls contributed to a slowdown in China’s exports to its largest trading partner, while retaliatory measures further strained bilateral trade flows. Weak export growth reduces the scope for global demand to mitigate China’s structural problem of industrial overcapacity. China is now forced to seek new, often less lucrative, markets in the Global South2. Indeed, China's exports to the Global South exceeded its exports to all developed markets in 2023, with exports to the US comprising just 15% of total exports, down from 20% in 2018. This strategic shift reflected the diminished ability of the US to pressure China through tariffs as the centre of gravity of China's trade shifted. Source: Various Questions: (a) With reference to Table 2, explain the relevant indicators that would suggest there was an increase in China’s standard of living from 2019 to 2023. [4] (b) With reference to Extract 5, explain two potential economic consequences of deflation for China. [4] (c) With reference to Extract 6, explain how high youth unemployment rate might impact China’s government budget and long-term economic growth. [4] (d) “This presents a growing dilemma for Chinese policymakers in trying to balance short - term economic recovery with the imperative of long-term fiscal sustainability” (Extract 7) Discuss the extent to which China should prioritise “short