China’s Economic Woes Go Well Beyond Tariffs

Employees work on a micro motor production line at a factory in Huaibei on June 23, 2018. -/AFP/Getty Images

WASHINGTON—Last year, the world’s second-biggest economy experienced its slowest domestic growth in nearly three decades. But while China’s economic troubles run deep, they aren’t driven by the trade war with the United States, an expert says.

The weakening in the Chinese economy has nothing to do with the U.S.–China dispute, according to Derek Scissors, a resident scholar at the American Enterprise Institute (AEI) and chief economist of the “China Beige Book.”

“It has to deal with the longstanding failure to engage in pro-productivity reform,” he said at a Heritage Foundation event on May 30.

Sources of growth—innovation, capital, labor, and land—were all in “bad shape,” and there was no movement toward change, he added.

According to Scissors, official data for economic expansion shows a pretty clear trend, where the growth of gross domestic product (GDP) fell to 6.6 percent in 2018 from 14.2 percent in 2007.

However, China’s economic troubles may be more severe than official data indicates. National wealth as an alternative indicator may be much more informative than GDP, he said.

According to a report by the Credit Suisse Research Institute, China’s total national wealth grew 26 percent from the end of 2013 to the middle of 2018. However, in the previous five years, which is the aftermath of the financial crisis, the growth was 132 percent.

In the past 4 1/2 years, in comparison, U.S. total wealth has increased faster than China’s, at 29 percent.

“So, China has a growth problem and it is understated by official GDP,” Scissors said.

According to Scissors, official disposable income in China is one-ninth of the U.S. level.

“It’s not anywhere close to being a rich country. It has become highly indebted only in the last nine [or] 10 years, and growth has slowed dramatically over that same period,” he said.

There is a concerning rise in debt levels, despite Beijing’s ongoing campaign to curb risks. According to the Institute of International Finance, China’s debt-to-GDP ratio is close to 300 percent.

In the past decade, the Chinese regime heavily relied on debt to boost investments and economic growth. Since 2016, Beijing has been trying to reduce its reliance on debt through its deleveraging efforts. However, the recent trade war is likely to put a dent in the process of reducing debt.

“I suppose the trade conflict could make China borrow even faster,” Scissors said. “That’s what’s happened so far this year. They were already borrowing themselves to death before this.”

In addition, China is vulnerable to foreign exchange pressure from the United States, he added.

Demographic Problems

China’s aging population also creates new challenges for the government. Working-age population between the ages of 20 and 64 began to shrink in 2017.

And China’s median age is forecast to increase to 47 by 2033 and 56 in 2050, according to Yi Fuxian, a senior researcher at the University of Wisconsin–Madison. In comparison, the median age in the United States will be 41 in 2033 and 44 in 2050.

Demographics are going to hurt the Chinese economy much more than the trade war, Scissors said.

Although bilateral trade between China and the United States is significant, neither economy relies on trade for domestic growth.

Last year, U.S. goods and services trade with China totaled $739 billion, making China the largest trading partner. Exports were $180 billion and imports were $559 billion. Yet total trade flow with China equaled only 3.6 percent of U.S. GDP.

The United States is also China’s largest trading partner; however, total U.S. trade of goods made up only 4.9 percent of China’s GDP in 2018.

The Trump administration’s increased crackdown on Chinese investment in the United States, as well as export controls, also exacerbate China’s economic woes.

The new U.S. legislation, which was signed into law in 2018, granted more power to the Committee on Foreign Investment in the United States (CFIUS) to monitor foreign investments in the United States. In addition, the Trump administration has also taken steps toward issuing more restrictions on exports of high-technology products to China.

According to Scissors, it’s too early to quantify the effects of these changes on the Chinese economy.

“We still don’t have the implementing regulations,” he said. “We need to see the regulations, which are coming out over the course of this year. And then we need a year of data to see the impact.”