The widespread observation that China’s economic growth has slowed markedly and faces a long period of stagnation has attracted global attention in recent weeks.
“The end of the Chinese miracle” shouted headlines in the global media.
It was reported in some publications as though there had been no warnings about the possibility, and the economic downturn was a shock.
Yet many dispassionate economists and commentators had been warning of the possibility for years.
The Chinese Communist Party (CCP) has been lauding a return to higher economic growth following the end of the COVID-19 pandemic. But growth remained stubbornly unresponsive.
While a true picture of the Chinese economy has remained unclear, especially as the regime progressively ceased publishing key data, reliable indicators of its declining state remained.
2 Factors Stand Out
Two events had a major impact on assessments of China.First, the regime decided to stop publishing youth unemployment data.
This decision was taken after the figure reached 21.3 percent—which suggests that the real level may be even higher and rising. This followed the withdrawal of other data.
Second, the problems experienced by some of China’s largest property developers.
Evergrande has applied for bankruptcy in New York and the Cayman Islands, even as it continued to deleverage at home. These actions allow it to protect its assets in the United States.
Country Garden, China’s largest private property developer, has missed a US$22.5 million repayment. Other companies, such as Zhongzhi and Soho China, are also in significant financial difficulties.
The market for Chinese developers’ dollar-denominated bonds has seen a meltdown over the past two years, losing a staggering 87 percent of value. The rout has wiped out $135.5 billion of value from $154.9 billion of outstanding notes, according to an analysis by Debtwire.
More than 50 building firms have collapsed in the past two years.
The country’s three trillion dollar trust industry is also facing significant financial challenges.
Foreign investors have been dumping Chinese stocks and bonds more generally while its banks have been attempting to prop up the yuan.
China’s problems have been long in the making. They predate Xi Jinping, but his rule has exacerbated the difficulties.
His ideologically driven hostility to private enterprise; his demand for self-reliance, both personally and nationally; and his belief that the populace must build now for a glorious future—which involves saving rather than spending, and investing rather than consuming—has resulted in a failure to address the widening fault lines in the Chinese economy.
The continued emphasis on state-owned enterprises and a disdain for private enterprise are at odds with the reality of the Chinese economy where private firms contribute approximately 60 percent of GDP, 70 percent of its innovative capacity, 80 percent of urban employment, and 90 percent of new jobs.
The imbalance between savings and investment, and productive growth has been developing for more than a decade.
The emphasis on savings and investment in property has resulted in an unsustainable bubble, disguised to date by debt increasingly being absorbed by provincial and municipal governments.
Compounding Challenges to the Economy
The U.S. Secretary of Commerce Gina Raimondo, who visited China recently, said that U.S. firms had described the country as “un-investable because it had become too risky.”The challenges are exacerbated by the long-term decline in the fertility rate, which is likely now to be less than one child per woman. This alone has a significant impact on economic growth.
China is on track to become old before it becomes wealthy, stuck in a so-called “middle-income state.”
China will remain a very substantial economy for decades, but it is likely now in a slow, long-term decline.
The communist regime speaks about an investment stimulus but has not changed the fundamental policies required to achieve it. Foreign firms are fleeing the country, concerned amongst other things for the safety of their employees.
Countries such as Portugal and Italy are likely to withdraw from the Belt and Road Initiative while others like Germany are beginning to challenge their trade imbalances.
Mr. Xi’s inability to moderate his ideological imperatives to meet the challenges facing his nation is now telling. His apparent belief that he can determine whatever outcome he desires—as evidenced by his “thoughts of Xi” on almost everything—is now clashing with reality.
In a speech delivered in February—released in August—Mr. Xi urged “historical patience” in achieving “modernisation with Chinese characteristics.”
Beijing Unlikely to Change Course
Most telling were the recent comments of Joerg Wuttke, the long-time head of the EU Chamber of Commerce in China and a leading industrialist.Asked if there was anyone who could persuade Mr. Xi to adopt a more collaborative posture, Mr. Wuttke said it was impossible.
“No, I see no possibility for anyone from abroad to influence him because the man has decided to be chairman of everything, and he makes the decisions,” he said. “And hence, he cannot, for the sake of it—revise decisions.”
Mr. Wuttke said the CCP’s tactics were deliberate and that the economic weakness invited the question of how stable China could be in the “enhanced Xi Jinping echo chamber” that prevails in Beijing.
The old equation was always that the Chinese authorities did what they could to boost economic growth because that was what kept them in power. Now what keeps the party in power is utter, 110 percent control.
The recent disappearances of the foreign minister and defence minister, and the purging of other high-ranking officials, suggest that there is a real contest within the CCP for the future of the party.
These events do not bode well for the country.
With domestic discontent growing, Mr. Xi has amplified his nationalist rhetoric by drawing a new map of China’s territory, increasing the military intimidation of Taiwan, and amplifying the aggression against nations such as the Philippines.
He snubbed the G20 summit and is presiding over a more isolationist China.
The possible consequences for nations like Australia are far-reaching.
First, while business has been diversifying its markets and reducing reliance on China, the economy is still dependent on trade with the “middle kingdom,” especially our resources.
Other sectors including tourism and tertiary education also remain exposed to China.
Secondly, there is the worry about Mr. Xi’s bellicose rhetoric.
“We must be prepared for worst-case and extreme scenarios,” Mr. Xi told China’s National Security Commission in May. He called on officials to “enhance real-time monitoring” and “get prepared for actual combat.”
The risk of a miscalculation by Mr. Xi is real.
