.png)
by Paul Doran at May, 12 of 2024
In January, Broadway Intelligence took a look at China’s faltering economy. Four months on, we revisit the topic and assess how successful China has been in steadying the boat and returning to robust growth.
Currently, President Xi Jinping and his economic advisers will be cautiously optimistic that the country is starting to recover from the severe economic turbulence it has experienced over the last 24 months caused by the collateral effects of a lengthy and hyper draconian Covid-19 lockdown and the bursting of a speculative property bubble that has had a destructive ripple effect for both private investors and the public finances.
The latest Chinese inflation figures from the country’s National Bureau of Statistics1 show a slight increase in the consumer price index of 0.3% in April up from the 0.1% recorded in March of this year. Even such modest growth in prices will encourage the Chinese government that consumer confidence is returning albeit gradually and that its policy of avoiding directly inflationary measures designed to boost consumer spending are starting to pay dividends. But real risks remain for the Chinese economy in 2024.
In March, the government set a growth target of 5% for 2024. Sluggish consumer spending and a continued preference to save rather than spend will make this target difficult to achieve. Exacerbating the situation is the continued fall-out from the real-estate slump. Again, despite some tentative signs of recovery, the sector is far from being out of the woods and could still derail the government’s ambitious growth predictions.
For example, in April, Vanke China, the southern-based property developer which appeared to have dodged a bullet at the height of the crisis, has seen the value of both its bonds and its stock price take a severe hit in recent weeks. Around a third of Vanke China’s shares are held by a state-owned rail operator. If it were to go the way of other real estate behemoths it would probably force a government bail- out.
So, with domestic consumer spending still stalled and the real-estate sector still toxic by and large, Xi’s big bet remains on a long-term shift away from the classic middle-income model of low value-added exports to what the government calls "new quality productive forces" (NQPF). This means investment in high-technology manufacturing clusters with output moving up the value chain, from mobile telephones, clothing, rolled steel, furniture and plastic toys to high-quality, high- value products such as green energy components and, prominently, electric vehicles (EV). Indeed, China aims to become a global leader in high-tech manufacturing, with the goal to increase domestic content of core components and materials to 70% by 2025. But how risky is this bet?
Certainly, there is nothing ignoble in China’s wish to upgrade its economy and the general standard of living of its population. Moreover, sustained year-on-year economic growth is part of the Chinese Communist Party (CCP)’s unofficial social contract with its 1.4 billion citizens: the party delivers greater material wealth in return for an acceptance of its absolute monopoly on power (backed up of course with a repressive surveillance state of dystopian proportions).
But China’s methods to achieve this transformation are contributory factors to the country’s deteriorating geo-political and geo-economic relations with the United States, and to a lesser extent, with Europe. Washington and Brussels accuse China of not playing by the rules it signed up to in 2001 when it joined the World Trade Organization (WTO). They point to subsidies and soft loans to domestic producers, an undervalued currency, forced technology transfer imposed on foreign investors, and a relentless global campaign of cyber-espionage that has stolen billions of dollars’ worth of intellectual property from foreign companies.
Fewer and fewer are the voices in the US – some CEOs notwithstanding – who believe the US should persuade China that it has a stake in maintaining the international trading system, from which it has benefited enormously since 1979, and that abiding by WTO rules is the surest way to grow and modernize its economy.
Current indications are that US President Joe Biden will shortly announce fresh tariffs on a range of Chinese exports, rolling out new, targeted tariffs focused on industries connected to EVs, including batteries and solar cells. Such action by the Biden administration comes as no surprise as the president has largely retained the tariffs introduced under his predecessor Donald Trump.
Xi will not doubt interpret new sanctions as further evidence that the US is out to constrain China’s growth and prevent it from overtaking the US in economic might. There may be an element of truth in that. But Xi’s interpretation of events through this strictly national-security lens, and his reluctance to end or even reform China’s mercantilist economic policies, augurs poorly for the future success of his plan to transform the economy.
Clearly, both China and the US are now committed to the so-called "de-coupling" of their economies, rolling back from the high watermark of mutual investment and integration of the 1990s and 2000s. How that de-coupling will curtail or even derail Xi’s big bet on economic transformation remains to be seem. We will check in again next quarter to see how things are progressing for the Chinese economy.
Comments