Strong headwinds


Unfavourable conditions are brewing in China. Harbingers of crisis? Global powers have to face a whole range of variables – and Captain Xi knows it

Any inquiry that means to establish the existence of an economic crisis in China must avoid two initial pitfalls. The first is the volatility of local statistics, often manipulated for propaganda and internal purposes, or at times released in order to appease international stakeholders. The state apparatus has a very close control over the numbers, as if all data collection in China was an exclusive prerogative belonging Beijing. The second danger is making too much of quarterly variations, the constant evaluation of the indicators that teem in all the macro-economic surveys and stock exchange indices. The comments often point to a decline or weakness and are led to believe that the economy is shrinking and not just in terms of its growth rate. A few commentators have even called for a systemic crisis in China, blinded by their irresponsibility and mindless of the boost that the Dragon has effectively provided to world growth. Although their teacher may have been disowned by the facts, the followers of the United States intellectual Gordon Chang have not become extinct. They are all awaiting the prophecy of the lucky book The Coming Collapse of China, published in 2001, as if its most famous claim – “The Chinese State will collapse soon, The People’s Republic has five years, perhaps ten, before it falls.” – were not past its sell-by date. Beijing may not have overcome the dangers outlined by Chang – the first of which was the impossibility of collecting debts from the main state banks – but it has shown it can easily live with them without collapsing. Probably the analysis needs to take a closer look at trends, rather than relying on a crystal ball.

To establish the existence of a crisis, the first sign that should be analysed is the rate of GDP growth. The Chinese GDP has grown by 6.5% in Q3, making it almost certain that it will achieve an equivalent annual value. In 2018 the country’s wealth should increase by 6.3%. It is therefore a planned slowdown, largely foreseen and arranged by the Chinese regulators. Ever since his coming to power in 2012, Xi Jinping has clearly indicated that he intends to relinquish the “obsession with growth”. The two digit increases boasted by his predecessors were proof of a country that was engaged in a spectacular rise along with its multinationals that fed it with technology. That submissive China, “the world’s factory” and a magnet for investments has been consigned to history, at least as far as Xi is concerned. The President has no intention of striving for dubiously prestigious records for the production of consumer goods and construction materials, he means to raise the country’s production levels. He wants to abandon labour intensive productions and replace them with technological sophistication. The China 2025 plan is the guiding star for the “Renaissance of the Chinese nation”. A few GDP percentage points can be sacrificed, because change is not immediate and the goal is radical. The idea has taken root that one can’t continue to grow indefinitely at the kind of rates that marked the incredible 40 year period since Deng Xiao Ping’s reforms. Even mathematically it gets harder and harder to retain the same rate: every year China increases its economic clout by as much as Turkey’s GDP. It could be that economic maturity is considered more important than its performance.

So where are these warning signs coming from? From at least two sources. On the accounting front, the GDP variation is the weakest since the 2008 crisis; perhaps a quantitative concern is advisable. More significant is the tangle of contradictions that makes the administration’s actions so very complex and not devoid of repercussions. The key question is simple and challenging: how to bolster the economy without boosting inflation, avoiding excessive debt and forbidding unwanted outcomes? The imposition of American tariffs has made the slowdown steeper by a predictable amount of between 0.2 and 0.5% of GDP. The outrageous size of the trade surplus with Washington – 375 billion dollars in 2017 – have triggered the Trump administration’s unilateral decisions against China which will in all likelihood achieve modest results though these will be highly vaunted in terms of propaganda. Furthermore, consumption is China is still very low and stands at 37% over GDP. This is clearly a very contained value, and defiant of to economic theory. It’s probably due to cultural heritage, to the value awarded to thriftiness and the need to save in order to compensate for the reduction of welfare.

So it’s still investments that Beijing relies on to fuel its economic development. However, it does want to avoid a duplication of the vast Keynesian manoeuvre of 2008, when it inputted 586 billion dollars into the country to prop up demand. At the time the collapse of exports due to the international crisis suggested a stimulus of the internal market was required. As we well know, that stream of cash was channelled down the darker shadow banking alleys and into the gaps of a system rife with inefficiency and into traditional goods sectors. Today, Beijing can no longer and has no intention of heading down that same path. The country’s direction is now in more expert hands and what’s more many internal enemies have been eliminated, felled by the axe of anti-corruption. China is therefore in a position where it can confront a dilemma with more strings to its bow.

The Central Bank (the People’s Bank of China, PBOC) has in fact loosened its monetary policy. The compulsory reserves h credit institutions have already been reduced, and more resources has been funnelled in to encourage loans. It’s likely that the benchmark interest rate may also be reduces, since it has stood unchanged since 2015. One of the targets is clearly the widespread incidence of usury. Peer-to-peer lending, the individual loans that fund business activities the success of which determines the restitution of the loan are instead encouraged. Tax relief for the lower wage brackets have also been introduced, along with the halving of the tax on car sales. Beijing has also granted the provinces the right to issue a greater number of their own bonds, to support infrastructure construction. The latter is still essential to development and any reduction is difficult to offset. This however is a very perilous front, that harbours collusion and an ominous lack of transparency. It has the same characteristics as state companies, all too often beyond the reach of any restrictive orders thanks to their political protections. As guarantors of power balances and employment, they have used their privileges to reduce taxation and promote profit reinvestment.

Similarly the reassurances provided by the PBOC have been clear cut: «The prudential monetary policy will remain neutral, we shall keep the main currency market under control and guarantee a reasonable level of credit expansion and overall funding for society». This implicitly bans fuelling the real estate bubble that had reached danger levels and sent house prices through the roof. Xi’s message came across loud and clear: houses are made to be lived in, not for speculation.

So it seems pretty hard to claim that China is in crisis. The close control exercised over the country provides great scope for economic policy. However, contradictory signs are multiplying and provide glimpses not so much of weakness as much as lack of experience in handling complex situations, where there’s no enemy to be fought but many variables to be juggled. This is probably Beijing’s main issue: whether it can organise its strength and recognising that its own specificity fades into the background as soon as it becomes a global power and is then, like almost everyone else, affected by winds that it can’t always head off successfully.  

You will find this article in the eastwest paper magazine at newwstand.


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