Paul Krugman’s article in New Yok Times, Is China in Big Trouble, The Wall Street Journal article, The Slow Meltdown of the Chinese Economy, Ruchir Sharma’s article China is faltering, but The World is not Feeling the Effects, and South China Morning Post article China’s Growth Model is Losing Steam and many more indicate that the Chinese economy is at risk of a slow melt driven by low consumption, high savings, declining population, weak social security net and an over reliance on real estate. The sense one gets is that a recovery is difficult and the slowdown will endure. However theories of China collapsing have been propounded many times only to see china continuing its rise unhindered. So how do we get an reasonably accurate assessment of in an opaque system like China? Hence I collected relevant articles which indicate the causatives and drivers of the Chinese slow melt. Hence for each driver, a few headlines and relevant extracts have been put forth with an analysis. The overall analysis stitches the larger picture together at the end.
Driver1 – Big Tech
Headlines : A year into China’s tech crackdown, the sky is no longer the limit for China’s Big Tech and When Chinese tech firms like Lenovo get caught in a nationalist social media storm and Ultra-leftist voices are making themselves heard in China, but at what cost?
Excerpts : China’s tech giants fell in line with new national priorities that emphasised hard technologies and common prosperity. As Big Tech companies came under pressure to reform their business models, an era of exceptional growth drew to a close… Leftist bloggers are targeting private tech firms, entrepreneurs and capital markets…pushing a socialist agenda in the name of patriotism. Ultra-leftist sentiment riding on the rising tide of nationalism is gaining popularity on the Chinese internet. China’s largest PC maker (Lenovo) grilled on social media over its sale of state assets, high executive pay and its foreign executives threatening national security…Owners of private companies worry they will be the next target of online campaigns…2021 marked a watershed moment in the development of China’s internet-related industry, when government regulators ring-fenced their unfettered expansion…the government made it significantly harder for Big Tech to acquire data under new laws…undermining the ability of tech firms to grow and make money… a key source of economic growth – including jobs for young graduates…The country’s tech entrepreneurs also play a key role in maintaining links with international tech firms and capital, both necessary to avoid a tech “decoupling” that would be detrimental to China’s interests.
Analysis. The tech biggies have been reined in and wealth destroyed. Over and above that , a recent phenomenon is the emergence of a hard line leftist nationalist movement which is toeing Xi’s common prosperity line and grilling the big tech industry. The cartoon in SCMP says it all. The larger issue is that the Communists will not loosen their control on data. Overall, the Chinese big tech sector will not get back its mojo and will not be a driver of the Chinese economy that it once was. For youth, it is no more a go to sector for jobs.
Driver 2 – Real Estate and Property
Excerpts: Highly leveraged property developers – including China Evergrande, Kaisa and Fantasia – are facing severe liquidity crunch and missed interest payments on offshore debts in recent months as Beijing moved to prevent overleveraged developers from obtaining bank loans…High-net-worth customers, who were among the biggest buyers of high-yield bonds issued by mainland Chinese property developers, have become some of the worst-hit investors amid the companies’ financial distress.
Analysis. The ghost cities are coming to haunt China. The Chinese government is controlling the fall, lest the debt bubble turns into a crash. There is no turn around visible. Real estate and construction industries combined account for around 29% of the Chinese economy. An analysis titled Peak China Housing mentions that China’s real estate has been an extraordinarily important driver of its economy. Real estate investment rose from 5% of GDP in 1995 to over 13% of GDP in 2019, of which more than 70% is devoted to residential building. Real estate not only accounts for 23% of household consumption, but it also connects to various sectors of the economy through investment, construction, and the financial system. To get a comparative idea, in 2018, real estate investment composed 13% of China’s GDP, while historically in the United States, this figure has been about 5%. The outsize footprint of the beleaguered real-estate and property sector in the Chinese economy will keep pulling it down. The graphic below is revealing.
Driver 3 – Demographic Burden
Headlines : China population: without adequate pensions, more elderly say goodbye to their golden years and China’s population to peak in 2021 as demographic turning point has already arrived, threatening to disrupt Beijing’s economic ambitions
Excerpts : Compared to developed countries grappling with an ageing population, China is not equipped with a comprehensive welfare system. For many rural residents, including migrant workers, retirement is a fantasy due to limited savings and pension plan coverage…The size of China’s population already peaked this year, which is much earlier than expected…Falling birth rates, an ageing population and shrinking labour force represent headwinds that could disrupt China’s economic development…the number of births across the country fell 20 per cent to about 10 million in 2021…while the number of deaths could be more than 10 million this year.
Analysis. Falling birth rates, a shrinking work force and an ageing society are not the harbingers of growth. Coupled with unemployment and lowering wages, consumption is decreasing. It will impact the ‘dual circulation plan’ heavily. The Chinese population is ageing without a social security net. By nature, Chinese consume less and save more. Their savings are mostly locked in real estate which is going down. Frightening prospect for the expanding number of old people. Every other day one sees an article on the demographic factor which raises the spectre of an irreversibly declining Chinese economy.
Driver 4 – Covid Effect
Headlines : Living with zero Covid in China: 2 years on with no end in sight and China’s first Omicron case is overseas returnee in northern Tianjin city and 19 cases spark mass testing in south China city
Excerpts : From traders to professionals and schoolchildren, coronavirus curbs have upended lives across the vast country…While strict border controls and quarantine have kept the majority safe, zero-Covid strategy suggests restrictions are not likely to be lifted any time soon…Zhejiang province remains the focus of the latest coronavirus outbreak in China, with 74 more cases on Sunday…China has its first case of the Covid-19 variant, a patient in Tianjin… Millions of residents in Dongguan warned of legal consequences if they fail to comply as authorities race to stop the spread…Meanwhile, tracing is under way to identify contacts of China’s first cases of the Omicron variant.
Analysis. The corona is slowly but steadily debilitating China. The daily case numbers are also increasing. The entry of the Omicron variant will worsen matters. The fight against Covid is more political. Xi Jinping and company have staked a lot in their Zero Covid policy of shutting the virus out and they are failing. A genetically vulnerable population, ineffective vaccines and a fast mutating virus which is beating the extensive lockdowns implies that Covid will eventually take a toll on China more than on other nations and people. Covid is isolating China and throwing normal life out of gear far more than expected. The long lines of people waiting for testing tell you a real story. Till such time the virus persist, China will remain under the pump.
Residents line up for Covid-19 tests in Tianjin in November. Photo: Xinhua
Driver 5 – Economic Indicators
Headlines : Show us the numbers on China’s economic risks, former finance minister saysand China’s retail sales slowdown highlights fear of ‘threefold pressure’
Excerpts : Lou Jiwei says statistics should reflect the negatives and positives of the challenges the country faces…Rosy statistical picture presented in the data a contrast to the leadership’s tone last week…Evidence of the “threefold pressure” facing China’s economy came thick and fast…as retail sales growth slowed and coronavirus outbreaks continued to disrupt production and the labour market last month… when high exports growth can’t be sustained, at what level can GDP keep growing and what can keep supporting the creation of new jobs…home prices have continued to fall while the number of new housing projects has been trending down in recent months…Car sales, a vital tool to boost consumption especially in a sluggish economy, recorded a 9 per cent decrease last month compared to a year earlier…Weak consumption, unemployment and pay cuts, and low expectations… how can the consumption be good?
Analysis. When a former finance minister states in public that the economy is far from rosy in China, we need to believe him. Further, all indicators show a down trend. The Chinese GDP going down is not an issue. The issue is how fast is it going down. The public mood is ‘Weak consumption, unemployment and pay cuts, and low expectations… ‘
Driver 6 – Food and Resource Insecurity
Excerpts : China needs to establish a ‘strategic baseline’ for key primary commodities such as energy, grains and minerals, Xi Jinping says…Resource shortages could turn into a ‘grey rhino’ risk – an obvious yet ignored threat – for the world’s No 2 economy.
Analysis. China is a resource challenged nation. It is food insecure, water deficient, energy scarce and lacks mineral resources. For the past two years, Xi Jinping periodically keeps making statements that China should be self-sufficient in these commodities. However that has not happened. His statements indicate that there is no indigenous solution. All prices of items which are scarce in China are going up. Food inflation is happening in China. Input costs are rising. Export orders are reducing or are at non-remunerative prices. There is a lot of agony at the bottom…it compounds the other drivers of the meltdown.
Big Tech and Real Estate Infrastructure , the major drivers of the Chinese economy are in reverse gear. An ageing/ shrinking population and Covid effect are prolonged dampeners on the Chinese economy. The newfound left wing hardline activism will add spice to the menu. The production and investment driven Chinese economic model has run its course. Xi Jinping was not a fool to institute the ‘Dual Circulation’ plan wherein China starts consuming to offset export fall. Consumption will not pick up since people know that the government will not support them in their old age or pay for health care. Hence they will save to accumulate assets. The problem is that the assets are ghost cities with declining values or beaten down big tech firm shares.
Amidst this slow-melt, the military is steaming ahead with its modernisation. Every day, we hear of a new military or space capability – hypersonic missiles, spaceplanes, navigation systems, aircraft carriers, stealth planes, amphibious assaults, exotic communications etc . These are costly non-remunerative hobbies. Any military planner will know that the revenue budgets are normally three to four times the capital budgets. The crunch will come a few years down the line when these expanded hi-tech capacities start placing their demands on maintenance support. The military and space expenditure will drag the economy down further unless there is a return of income from them before it is irretrievable.
Overall one is looking at a China with a constantly weakening economy, a growing military and a declining population. In essence, China will be increasingly out of balance. The likely outcomes are that either China will go down the chute slowly or it will regain its ascendancy militarily. China can regain its economic mojo by either conquering Taiwan or inflicting a military slap on India as I have outlined in my earlier article Sino Indian Logjam : The Coming Conflict. In either of the cases , if successful, it would have marginalised USA geopolitically to revive its economy as the number one global power in the world. It will also lead to a coercive revival of the BRI.
What are the chances of either happening? One has to see the internal politics of China and Xi Jinping as to which way the winds blow. As always, everything in China depends on its politics. At present its politics is about Xi Jinping trying to anoint himself as China’s boss for life. The real game will unfold down the line in 2022 when it will be clear as to will govern China. Till then we need to wait, watch, analyse and prepare. Sometime back a diplomat cautioned me not to underestimate our adversary. I agree with him. However we should also not overestimate our adversary and make him a ‘Hanuman’ either. A balanced, informed and a realistic view is needed. This analysis attempts that.