Warwick Wealth Matters – August 2023August 24, 2023
International and Local Market ReviewAugust 29, 2023
An Article By Ian Kilbride.
The Chinese economy is in deep structural trouble, which, in turn, spells trouble for the global economy and equally for us here in South Africa. But it’s far too soon to conclude that the Chinese economic model is “washed up on the beach” as one asset manager recently claimed. The Wall Street Journal is probably closer to the mark in its view that China’s 40-year boom is over. But is this true, and if so, how did it happen and what are the implications for the world’s second largest economy and the world more broadly given that currently 30% of global economic growth stems from China?
As the source of the Covid-19 virus, China is now suffering its longest impact, not in medical terms, but rather economic, due in part to the government’s heavy handedness in locking down the most productive nodes of the economy for an extended period and far beyond those imposed by Western countries for example. While the economy has shown signs of recovery, it has failed to reach anything like the levels hoped for and expected by Beijing. The protracted lock-down has also had a lasting impact on investor and consumer confidence, both of which are vital to Xi Jining’s vision of a more advanced, sophisticated and consumption-driven economy.
This links to a structural feature of today’s Chinese economy and one that threatens its current stability, which is the overreliance on the massive infrastructure build programme and consequential accumulation of mountains of debt. In simple economic terms, supply has far outstripped demand for infrastructure ranging from rail, roads, airports and finally housing. In July this year, demand for new home sales fell 33% year on year. The most public case of oversupply and unsustainable indebtedness is that of the failure of giant real estate developer Evergrande, which after many months of domestic troubles, has filed for bankruptcy protection in the United States. Another huge housing developer, Country Garden Holdings, may follow suit.
This is the immediate threat to the Chinese economy, but the troubles are far deeper. Having lifted at least 400 million people out of poverty since the 1978 launch of Deng’s economic reforms, the future picture is not looking quite as rosy. A few statistics convey this. From around 2030, China’s working age population will begin falling. The economy’s factor productivity figures have flattened, with the return on both state and private sector return on assets now less than half the 2017 figure. On current World Bank forecasts, Xi’s objective to double the size of the economy by 2035 will not be met and indeed, China may not overtake the US as the largest economy. The IMF projects China’s economic growth to fall below 4% in the coming years, with some economists forecasting 2% growth by 2030.
For such an industrious country, it is alarming to note that youth unemployment now exceeds 20%. Xi’s vision of transforming the economy into a consumer-based economy also faces important political, economic and social challenges. Whereas command economies with huge state intervention have achieved success in driving infrastructure and heavy industry-led growth, there is no such precedent for state-led consumer growth, less still fundamental economic transformation. The inconvenient truth facing Beijing is that consumers are individuals who wish to make economic choices about relatively scarce resources. You simply cannot collectivise consumers and less still determine their preferences.
And it is here that perhaps lies the greatest challenge facing Beijing, the Chinese Communist Party and Xi in particular, which whether the state or any centralising authority can successfully direct a country of 1,3 billion and an increasingly complex economy to transition to a modern, competitive and consumer-led economy, and still retain control of all levers of the policy, economy and society? Personally, I suspect not.
Schadenfreude (the pleasure derived by someone from another’s misfortune) is a mean-spirited characteristic, and a particularly dangerous one when dealing with China. Those around the world who view China’s rise as a threat to their national or personal interests will view its faltering economy with some satisfaction. On this simplistic binary view, what’s good for China is bad for the West – as if the global economy were some kind of zero-sum equation, rather than a complex web of interdependence. Undoubtedly, there are many sectors that have been vacuumed up by the Chinese economy at the expense of US, European and South African industry. Steel making, clothing and textiles to name just two. Conversely, however, those same economies have benefited enormously from China’s rise, its remarkable economic growth and manufacturing cost efficiencies.
With this balance in mind, now is the time to re-engage actively with China on sensible and pragmatic terms, rather than the decoupling advocated by many in the West. Indeed, as the ancient Chinese curse reminds us, “Be careful of what you wish for.”