The triple whammy of Covid, real estate crisis and geopolitical grandstanding have resulted in China’s post-2020 trajectory increasingly resembling a deflating prosperity bubble. These three factors have converged to expose structural fragilities that were previously masked by three decades of breakneck growth. It is now being frequently asked whether the foundations of China’s economic success are durable or ephemeral.

Covid-19 was the first major stress-test of China’s development model since its accession to the WTO and it revealed how dependent the system had become on tightly managed narratives and investment-led growth. After initially suppressing information in Wuhan and then imposing draconian lockdowns, Beijing used “zero Covid” to display competence and superiority over liberal democracies, but this came at a steep economic and social cost. For most of 2020–2022, repeated and prolonged lockdowns disrupted supply chains, constrained consumption and weakened people’s confidence about future employment and income. These weaknesses persisted and precautionary savings stayed elevated even when restrictions eased, limiting the rebound in domestic demand.

Abrupt abandonment of zero Covid in late 2022 created its own shock. Instead of unleashing the kind of post-pandemic surge seen in other major economies, China’s reopening was muted: services recovered unevenly, youth unemployment remained high, and private investment hesitated in the face of regulatory unpredictability and weak demand. The result was that by 2022, China’s growth fell below global growth, for the first time in over forty years. This was an extraordinary reversal for an economy once expected to lead the world’s economic growth.

It will be naïve to think that Covid caused China’s structural problems; it merely revealed, amplified and accelerated the existing fragilities in its economy and widened the trust deficit between the state and private actors. Globally, Chinese leadership’s cold-blooded approach to a human crisis of its own making became more visible as the starving Chinese were seen bartering their electronic devices for half a cabbage. The long queues at the state-run crematoria, collective cremation and then putting ashes from the lot in urns for different families, and on top of it, compelling families to declare some other cause of death to lower the Covid death count, will not be easily forgotten in a society in which the dead ancestors are treated with even more respect than the living. The trust deficit between the people and the Party has widened to irreconcilable levels and that has wide implications for people’s participation in economic recovery.

Real estate sits at the centre of China’s perceived prosperity and its current economic malaise. For much of the 2000s and 2010s, property was the primary repository of household wealth, a key revenue source for local governments, and a major driver of GDP accounting, with related activities, for more than a quarter of the GDP. Rising home prices were normalized as an entitlement of middle‑class life, reinforcing the belief that urbanization and growth would indefinitely support asset values. Cheap credit for developers and high savings being parked in real estate fuelled demand and unrealistically upward prices, making household investment in the sector extremely attractive. The euphoria was, however, short-lived as Xi Jinping drew his ‘three red lines’ that severely curbed developers’ borrowings. Covid hurt the buyers’ capacity to pay instalments, banks repossessed the properties that were sold for a fraction of the outstanding loan and interest and the balance remained still outstanding against the households which, in spite of the high savings rate, ended up in the red.

China had been hiding its falling population for some time; the decimation of domestic wealth led to a fall in marriage rates too. Both these factors are cutting into housing demand and the property sector does not have a silver lining in the foreseeable future. This erosion of property wealth strikes at the heart of China’s prosperity narrative; for millions of families, apartments were not just shelter but the core of retirement planning, intergenerational transfers, and status. As prices slide and liquidity dries up, that core is hollowing out; the once-automatic assumption that “property never falls” has been replaced by anxiety; the resulting despondence is further depressing domestic consumption and increasing the propensity to save.

Banks have enough deposits but no borrowers and many of them are stressed. Bruegel, a European think tank specializing in economics, published an article in March this year, “China’s banking goliath: from growth engine to economic drag,” It described how China’s banking system, which had been utilized for decades to channel huge household savings towards creating infrastructure and manufacturing, is faltering. At its peak, China’s banking sector was the world’s largest, with assets of $60 trillion in the $18-trillion economy. As the demand for loans fell, the difference between deposit and lending rates, both administered by the central bank, fell to 1.7%, a historic low. The article said that China’s fight for global market share without consideration for profits was sustained by banks; as banks weaken, the bubble deflates.

While domestic shocks have eroded confidence at home, China’s external posture has contributed to what the IMF describes as “geoeconomic fragmentation pressures” that weigh on medium-term growth prospects. Beijing’s increasingly assertive “wolf warrior” diplomacy, its coercive trade practices, and military signalling around Taiwan and the South China Sea have deepened strategic mistrust among advanced economies and key trading partners. Sanctions, export controls, investment screening, and diversification efforts by multinational firms reflect a strategic recalibration that limits the scope for China to grow, as it once did, by deeply integrating with Western technology and capital markets.

The US-China rivalry has moved firmly into the realm of techno-industrial competition, with controls on advanced semiconductors, restrictions on outbound and inbound investment in sensitive sectors and effort towards “de-risking” supply chains. Meanwhile, tensions in the Taiwan Strait and China’s positioning on Russia’s invasion of Ukraine have hardened threat perceptions in Europe and Asia, accelerating efforts to dilute dependence on Chinese manufacturing and markets. The result is not an abrupt decoupling but investors and policymakers who once assumed that China’s geopolitics would bend around economic interdependence, are increasingly laying more emphasis on security concerns.

The policy environment for private enterprises, which has become more restrictive and unpredictable, is further eroding the investor confidence. Campaign-style interventions in technology, education, and finance over the last several years have reinforced the sense that the party-state is likely to rewrite the rules frequently, discouraging risk-taking and long-horizon investment. The Party’s emphasis on security, self-reliance, and ideological control, while understandable from the regime’s perspective, cuts against the openness and competition expected by investors.

China may continue to grow, but at lower, more volatile rates, with heightened risks of financial stress due to policy missteps and external shocks. The economy still boasts substantial industrial capacity, infrastructure, human capital, and state resources. Exports remain robust, cushioning the drag from domestic weakness and enabling headline growth rates around 5 percent according to official data, though some suspect that the true pace is lower. The party‑state retains powerful levers to manage crises, from capital controls to credit guidance. However, the character of Chinese prosperity is changing. Instead of a confident, surging society, it seems to have hit a plateau, where each additional increment of growth struggles against political, demographic and external constraints that were not present in the earlier take‑off phase.

The prosperity bubble, inflated by decades of export-led growth, infrastructural expansion, and property speculation, is deflating under the combined weight of Covid’s legacy, real-estate crisis, and geopolitical overreach. The question now is not whether China will remain important - it will - but whether the Chinese leadership can come up with a sustainable, post-bubble development model that reconciles their hegemonic ambitions with domestic and external challenges and constraints. With Xi Jinping at the helm, the answer is not positive. / DAILY WORLD /

( R N prasher is a former IAS officer. The views expressed are his personal.)