China's problems boil down to demand, derisking, demographics, and debt, economist says

• China is facing the "four D's": demand, derisking, demographics and debt, an economist said.
• The country's leaders are going about solving the problem the wrong way, focusing on the supply side instead of demand.
• Meanwhile, foreign investment is bleeding out of China and officials don't seem to grasp the seriousness of the matter.

China is mired in economic troubles, from a crumbling property sector, deflationary pressures, and a poor debt outlook. According to one economist, all of its problems can be summarized by "four D's."

"China is suffering from the four D's: lack of demand, derisking that the US and China are involved in, bad demographics, and heavy debt," Bill Lee from the Milken Institute said in a Bloomberg interview on Friday. "They really have a lot of headwinds to deal with."

And it's not just that those factors have weakened the economy — the country's leaders aren't taking the right approach to digging the country out of its hole, Lee said.

"Right now, the management of the economy, the Central Economic Work Conference that just took place, they're pulling out the old solutions which is, we're going to bolster the supply side, try to make our industries modern, and we'll try to shift our resources to try to bolster the supply side of the manufacturing sector — that is not the solution they need to support the economy," he said.

That's because China's problems are on the demand side — simply put, nobody wants to spend much. But fiscal policy in China, Lee explained, usually avoids putting money in the hands of Chinese households.

China did pass a stimulus package about a month ago, but it was geared more towards businesses than Chinese consumers. It also wreaked financial chaos.

As the economic malaise wears on, foreign capital is bleeding out of China. Foreign investors have dumped more than $25 billion worth of Chinese shares this year, the Financial Times found, erasing about 77% of the money previously invested in the market. Compounding investors' dim view of the country's prospects, Moody's this month lowered China's credit outlook.

"One of the things that is going to come out of the [US] election campaign is that everyone will agree that we need to derisk from China," Lee said. "And one of the results we already see is the diversion of capital flows away from China to the rest of Asia. Unfortunately, the Chinese don't seem to recognize the seriousness of this."