China’s medium-term economic prospects seem to be dimming rapidly. Suddenly, talk of American declinism has been replaced by emerging talk of Chinese declinism. From 2000 to 2019, China’s economy grew at an average annual rate of 9%. Since then, it has grown at half that rate and in a volatile pattern. In a world grappling with inflation, the latest Consumer Price Inflation number from China is -0.3%, reflecting a deflationary slowdown. The prospects of exceeding 5% growth over the medium-term appear to be dropping for a host of cyclical and structural reasons.
When the economy was doing well in 2019, the Chinese government began a series of steps that can broadly be described as increasing the state’s role, suppressing the power of market forces, and reducing both the actual amount of corruption as well as opportunity for unfair gain. The political economy objective was to eliminate alternate power structures in China and consolidate military, administrative and economic power within Xi Xinping’s control. The reorientation of the economy from private sector-led growth to a state-directed model appears now to have been a hasty mistake. China also appears to have overplayed its hand with an anti-espionage law, under which foreign businesses and businessmen have been prosecuted for activities that would be normal in most jurisdictions. This has made it very difficult to find employees willing to relocate to China. Worryingly for China, this has already resulted in declining foreign direct investment (FDI).
China’s complete lockdown during covid and its delayed and abrupt opening have played havoc with its economy. The property market has been beset with plunging prices, over-leveraged companies, piles of unsold inventory and suppressed demand. New real estate prices have fallen for 20 of the last 24 months on a month-on-month basis. Evergrande, a property behemoth with 1,300 projects in 280 cities, has a debt load of over $300 billion. Its share price has collapsed by 99% and it has defaulted on some of its foreign debt. Evergrande is not only not alone, but fully representative of the entire debt-ridden sector.
China’s decade-long project to diversify its economy away from fixed asset investments towards domestic consumption has failed to fire. While consumer sentiment appears to be gradually reviving, it remains below its levels in 2019. Excessive household savings that had once found their way into fixed assets have not switched to consumption, a caution that may be derived from the negative ‘wealth effect’ of depressed real estate value.
On a longer-term basis, China’s demographic decline has reached alarming proportions, a disastrous consequence of its multi-decadal one-child policy. Youth unemployment is so large now that Beijing has refused to publish figures. A high level of unemployment at a time when the country’s population has peaked suggests that growth estimates may be exaggerated. There is also a severe crisis of confidence among private businesses and consumers. The Chinese renminbi has reached its lowest point since the Global Financial crisis at 7.3 RMB to $1. Some experts argue that if the RMB were a free-floating currency with free capital flow features, it would have declined much further.
Yet, it may be premature to declare a permanent and meaningful slowdown in China. Beijing can lean against this with both monetary and fiscal policy. It has resorted to a bunch of half-measures that have permitted the situation to hold a line. However, in the face of a substantial public debt burden, China is reluctant to dramatically ease policy. It is fast approaching the point where it may have little choice but to do so.
Despite this, China’s free-wheeling spending on geo-strategic projects in its superpower race may need to be curbed. For instance, between 2014 and 2018, the Chinese Navy floated more new ships than the navies of Germany, India, Britain and Spain combined. To establish itself as the leader in experimental physics, China announced a large hadron collider that would be world’s longest at 100km, Domestically, it announced a massive 12,000km expansion for its high-speed rail network.
Until now, experts have held that China may seek global superpower status through one of two routes: 1) by using its emerging power status in the region to springboard; or 2) going directly after that status across the world. China has indeed been making both attempts in the last 10 or so years, using the Belt and Road Initiative (BRI) to create a web of dependency through these ties with other countries, particularly in Africa and Central Asia, while also engaging projects in the broader Indo-Pacific region. With a structurally slower economy and high debt burden, China may have to seek a more gradual path that begins in Asia before expanding so widely. China has already pared back some BRI initiatives in the Philippines, Pakistan and Ecuador.
China’s superpower rivalry with the US is still on, no doubt, but China is clearly behind its rival in this race and falling further back. This will either cause China to be more cautious about its belligerence and power projection or do exactly the opposite to distract people’s attention from these troubles. For the sake of peace and stability, we must hope that it is the former.
P.S: “If you have everything under control, you are probably not moving fast enough," said legendary race car driver Mario Andretti.
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China may have to slow down in the superpower race and tackle domestic problems
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06.11.2023
China’s medium-term economic prospects seem to be dimming rapidly. Suddenly, talk of American declinism has been replaced by emerging talk of Chinese declinism. From 2000 to 2019, China’s economy grew at an average annual rate of 9%. Since then, it has grown at half that rate and in a volatile pattern. In a world grappling with inflation, the latest Consumer Price Inflation number from China is -0.3%, reflecting a deflationary slowdown. The prospects of exceeding 5% growth over the medium-term appear to be dropping for a host of cyclical and structural reasons.
When the economy was doing well in 2019, the Chinese government began a series of steps that can broadly be described as increasing the state’s role, suppressing the power of market forces, and reducing both the actual amount of corruption as well as opportunity for unfair gain. The political economy objective was to eliminate alternate power structures in China and consolidate military, administrative and economic power within Xi Xinping’s control. The reorientation of the economy from private sector-led growth to a state-directed model appears now to have been a hasty mistake. China also appears to have overplayed its hand with an anti-espionage law, under which foreign businesses and businessmen have been prosecuted for activities that would be normal in most jurisdictions. This has made it very difficult to find........
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