Two news items from Asia illustrate at once China’s economic problems and Beijing’s ineptitude in dealing with them.
One is Apple’s decision to move iPhone assembly from China to elsewhere in Asia. The other is Beijing’s weak, almost comical efforts to stimulate consumer spending as an economic spur to replace weakening export relationships with the United States, Europe, and Japan, of which the Apple decision is a part.
Whereas Apple once did just about all its iPhone assembly in China, largely for export back to the United States and the rest of the world, Apple CEO Tim Cook spent his recent Asia visit talking about his firm’s plans to diversify sourcing away from China. The company has already made a big commitment to Vietnam, spending some $16 billion on facilities there over the past five years and, according to Apple commentary on Mr. Cook’s trip, making plans for a still larger commitment.
Also, on this recent visit, Mr. Cook indicated that Apple plans to expand its iPhone production in India, raising it quickly to one-quarter of the firm’s global production. At a stop in Indonesia, where Apple has no presence so far, he described the country as having “endless investment potential.” All this expansion will come at China’s expense, relatively and absolutely.
This is only the latest example of a series of moves by Western and Japanese businesses to shift their investment away from China to other venues, mostly elsewhere in Asia. The reasons for this shift and the problems it brings to China have three roots.
One is the failure of Chinese production to meet the needs of foreign buyers during the COVID-19 pandemic, especially after the world reopened while Beijing continued lockdowns and quarantines with its zero-COVID policy. This experience killed China’s once-strong reputation for reliability and accordingly erased a major lure for foreign investment and sourcing.
Second is Beijing’s recent obsession with security and espionage. Beijing has always imposed restrictions on foreign operations in China. However, this exaggerated obsession has led to raids on foreign businesses and has generally interfered with daily business, especially the ability for foreign-owned operations to do market research and communicate with their headquarters overseas. Such behavior can easily convince decision-makers that there is less to gain from a Chinese operation and more to gain from new facilities in Vietnam, for instance, the Philippines, and Indonesia, where other firms have set up operations.
A third reason to leave China is the increasingly acrimonious trade relations between Beijing on the one hand and Washington, Brussels, and Tokyo on the other. At one time, governments in these capitals supported Chinese development as a benefit to world trade and cooperation. However, Beijing’s unfair trade practices and belligerence in the South and East China seas have convinced these governments to change their thinking.
The United States has imposed tariffs on Chinese products, and recent comments from President Joe Biden suggest that tariffs are likely to increase. The same is true of his political rival, former President Donald Trump. Brussels is also considering the imposition of tariffs as punishment for what it claims is Chinese dumping of electric vehicles in its markets. So far, there has been no talk of new tariffs in Japan, but Tokyo has warned of Chinese practices and taken steps to avoid China’s cutoffs of vital products, particularly rare earth elements.
Along with these other considerations, the uncertainties imposed by harsher governmental attitudes have convinced businesses that places other than China are less risky. Such business decisions have denied China the capital investment on which its economy once relied, as well as the exports, employment, and income that once flowed amply from the production facilities these foreign firms built in China and operated there. China might well have encouraged domestic consumption as a substitute spur for economic growth to replace this loss of foreign support. But on this score, Beijing has shown remarkable ineptitude.
At present, the Chinese consumer is not a likely substitute. He and she are depressed from the legacy of the zero-COVID lockdowns. The stop-start pattern of economic activity that the policy imposed has undermined the confidence of the average working man or woman that he or she can earn a regular paycheck. In addition, the reluctance of Beijing to deal with the property crisis since it broke in 2021 has led to declines in homebuilding and buying that persist to this day. What is worse, Beijing’s neglect has depressed property values sufficiently to hurt household wealth. All these considerations have restrained consumer spending.
The weakness displayed by Beijing in remedying these pressures, especially in alleviating the property crisis, has ensured that Chinese consumers will continue with this spending restraint for the foreseeable future. So far, the most Beijing has offered is special financing for select property projects that the crisis had halted, which policymakers call “white lists.” But the amount involved is too small to make a difference. So far, the program has advanced barely 5 percent of the amount of the first property developer’s failure, much less all the failures that have followed.
Another policy support involves small interest rate cuts by the People’s Bank of China. Since the bank began this policy, interest rates have fallen by less than half a percent. Such tiny cuts are hardly enough to move households, much less businesses. Especially since, at the same time, China has moved from modest inflation to modest deflation, the tiny rate cuts might well constitute an increase in real interest rates.
The only other help Beijing has offered is to raise the recycling value of household appliances and automobiles. According to the Commerce Ministry, this will encourage households and individuals to replace items more frequently and buy more vigorously. The ministry claims that it will stimulate the economy and help the environment through a wider ownership of new, greener products. Such policies hardly seem sufficient to overcome the effects of zero-COVID and the property crisis. They do, however, inject a comic element into the equation. It is, after all, reminiscent of the efforts by the Obama administration after the 2009 recession in the United States to encourage people to trade in old cars and buy new ones to stimulate consumer spending and advance the green agenda. “Cash for clunkers,” as the program was called, had little effect. The Chinese effort has nothing more that should make it work any better.
China’s economy needs help. Beijing’s policymakers need to find better ways to stimulate consumer spending than they have offered to date. A massive refinancing of the property sector might help. They need to cool hostilities toward China trade in Washington, Brussels, and Tokyo, perhaps by abandoning their clearly unfair practices. They need to otherwise convince businesses in the United States, Europe, and Japan that a Chinese destination for investment is less risky and more reliable than it has become in the past five years or so. Since nothing along these lines has emerged so far, China’s economic problems seem set to continue for some time to come.
