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 beg