China's economy slowing way down? Really?
Snitz big rule of how to conduct foreign policy: "don't poke a big bear".
Ukraine, the US and NATO starting kicking Putin in 2014. They engineered a soft coup of the Russian leaning Ukrainian government. Then after promising neutrality, they started ramping up trade with the West, made noises about joining the EU & NATO and eventually allowed NATO to install hypersonic missiles aimed at mother Russia. Was it absolutely inevitable that Putin would invade. Yup. Not defending his actions, but poking him was stupid and the Ukraine will pay dearly.
China's been poking the US for quite a while. They've been stealing our technoligy, conducting unfair trade relations, stupidly talk about taking over Taiwan and in all probablility foolishly engineered a COVID stain in their lab which got out and you know the rest. So the US and the EU is is moving their supply chains elsewhere pulling business from a nation which is incredibly reliant on exports. Xi should not be poking the bear.
This comes at a time when China is knee deep in a demographic crisis (almost a third of the nation will soon be over 65 yrs old with too few young people to fuel their economy) and their massively overbuilt real estate bubble is about to burst. The RE sector has by some accounts represented almost 1/3rd of their GDP. Meanwhile, China's advantage in providing low cost labor to the world is over. Wage rates have increased over 10 fold in the past 13 years.
Conclusion: Xi might want to start reading the Spritzler Report. We have a Mandarin edition.
Why Xi Can No Longer Brag About the Chinese Economy
Two years ago, Beijing was ascendant. Now, as Biden and Xi prepare to meet at the Asia Pacific summit, U.S. growth is humming while China struggles with a property slump and local government debts.
A deserted Evergrande city plaza in Beijing in September.
By Greg Ip, WSJ
Nov. 14, 2023 12:01 am ET
In 2021, Chinese President Xi Jinping popularized a slogan signifying China’s expected displacement of the U.S. as the world’s leading economic power: “The East is rising, the West is declining.”
China that year had largely suppressed the Covid-19 pandemic and went on to record its fastest growth in a decade, while the U.S. struggled with repeated outbreaks of Covid and surging inflation. On the eve of a virtual meeting with President Biden at an Asia Pacific summit that fall, Xi was formally enshrined as China’s most powerful leader in a generation. Biden still labored under the shadow of his predecessor’s failed attempt to stay in office.
As Xi and Biden prepare to meet at another Asia Pacific summit, this time in person in San Francisco, Xi’s phrase is starting to look like hubris. China’s economy is beset by multiple challenges, from a deflating property bubble and unmanageable local government debts to slumping confidence and deflation. The U.S., meanwhile, has just recorded its strongest quarter in nearly two years while inflation subsides. China’s gross domestic product, which was 75% the size of the U.S.’s in 2021, had slipped to 64% in the third quarter, roughly where it was in 2017.
What happened in two years? The countries didn’t suddenly change direction. Rather, long festering problems in China bubbled to the surface, and Xi’s policies, Western experts conclude, made them worse. China isn’t literally declining, but its aspirations to lead the global economy have been set back, perhaps indefinitely.
“Beijing will never be able to make a credible claim to global economic primacy,” Logan Wright, director of China markets research at the Rhodium Group, said. China’s GDP may one day reach 90% or even 100% of the U.S.’s, but there’s no realistic scenario in which it reaches 150% or 200%, he said.
The U.S.’s relative GDP has recently been boosted by its higher inflation and China’s weaker currency. Nonetheless, over time it’s an important yardstick of a country’s ability to finance technological advance, project military power and attract other countries as partners.
Yet American triumphalism now would be as premature as China’s was in 2021. In the near term, U.S. consumption is likely to slow, and Chinese growth, which appears to have stabilized as consumers show signs of life, will still exceed that of the U.S. for the coming decade. More important, while as much as three-quarters of China’s economy faces headwinds, the quarter that doesn’t, manufacturing, will keep China an economic and military threat to the West for the foreseeable future—even if overall growth turns lackluster.
China’s growth, which averaged 10% a year from 1980 to 2012, was always bound to slow around now because of an aging population, less rural-to-urban migration and diminishing opportunities to catch up to wealthier countries.
But the slowdown has been sharper than expected. The World Bank now expects China’s annual growth in the next two years to average 4.5%, roughly a percentage point slower than it projected a decade ago. The International Monetary Fund sees growth averaging just 3.9% over the next five years.
Some of China’s problems are the mirror image of U.S. problems. Chinese growth has long been powered by investment, the U.S.’s by consumption, yielding the caricature of farsighted Chinese and shortsighted Americans.
In the past decade China’s formula went to excess. During the global financial crisis of 2007-09 China launched a massive stimulus program aimed at infrastructure, housing and later, technology. Local governments and developers financed this investment by borrowing from banks and the Chinese public, using new financing vehicles to get around borrowing restrictions imposed by Beijing. Chinese residential floor space nearly doubled between 2010 and 2021, exceeding 400 square feet per capita—matching Britain and France and double Japan’s figure, according to economists Kenneth Rogoff and Yuanchen Yang.
Whereas the U.S. has too few houses and infrastructure, China now has too much of both. Millions of apartments are vacant. Guizhou, a relatively poor province, is home to 23 of the world’s 100 highest bridges. High-speed railway track is growing more than twice as quickly as passengers, according to Rogoff and Yang.
Much of the debt to finance that investment, issued by developers and local governments to ordinary Chinese or Chinese banks, is in danger of default. The IMF estimates 30% of local government debt is nonviable. Collapsing revenue from land sales and business taxes have saddled local governments with yawning deficits. An August Rhodium report co-authored by Wright concluded that China has much less fiscal space than widely believed to finance industrial policy, defense and its Belt and Road Initiative of foreign infrastructure loans.
One of the supposed benefits of China’s autocratic system is the ability to act decisively, unconstrained by democratic checks and balances. Yet Beijing has yet to act decisively on local debts and bad bank loans by shifting them to the central government’s relatively healthy balance sheet.
Instead, it is restructuring them piecemeal. It recently announced it would borrow the equivalent of 0.8% of GDP to support local government finances, a fraction of their needs. This suggests China could be in for a multiyear financial quagmire akin to Japan’s in the 1990s. By contrast, when the U.S. housing bubble collapsed in 2007-08, the federal government mobilized quickly to recapitalize the banking system.
Like the property bust, China’s declining population is a slow-moving problem that suddenly accelerated in the past two years.
In 2017 the fertility rate, the number of children a woman could expect to bear over her lifetime, was around 1.6, below the 2.1 needed to maintain a stable population. Having scrapped its one-child policy, Beijing projected fertility would rise to around 1.8 between 2020 and 2030. Instead, it continued to fall, to 1.1 last year according to one study, one of the lowest in the world. Exactly why is unclear, but some analysts blame deepening economic pessimism among women of childbearing age. As a result, China’s population fell last year for the first time since the 1960s.
China’s property and population problems may be feeding on each other. Whereas the U.S. was able to grow out of its mid-2000s housing glut through growing population and immigration, China faces structurally declining demand because of its shrinking population and nonexistent immigration.
China needs a new source of demand to take over from investment and property. The most obvious candidate is consumers, who account for just 37% of GDP, compared to 68% in the U.S.
But Chinese authorities are ideologically opposed to boosting consumption, such as through more generous healthcare and retirement benefits, which would reduce the need to save. Meanwhile, Xi has worsened confidence through “a series of profound policy choices…that are now coming back to hobble the Chinese economy and its recovery,” said Barry Naughton, an expert on Chinese industrial policy at the University of California San Diego.
Starting in 2020, the Communist Party unleashed a regulatory crackdown on private businesses in online commerce, online education and gaming, ostensibly to clamp down on privacy and anticompetitive abuses but mostly to cement its control over the private sector.
Besides destroying roughly $1 trillion of wealth, Naughton said, Xi sent a “much broader message that all kinds of independent, high-skilled service jobs didn’t have a future. He was signaling, ‘I don’t like private businesses and I don’t care if I destroy value.’”
Xi has further undercut China’s economic prospects with a drive for self-sufficiency and geopolitical belligerence that have prompted the U.S. and Western Europe to “de-risk” by restricting trade and investment with China in strategic sectors.
An IMF study led by economist Shekhar Aiyar found that since 2010 foreign investment has increasingly flowed between countries in the same geopolitical bloc (as defined by how they vote at the United Nations). As a result, China received 60% less foreign direct investment in strategic sectors in 2022 than in 2015, while the U.S. enjoyed 43% more.
Just as globalization helped China more than the West because it had so much more room to catch up, deglobalization will hurt it more. Another IMF study considered a scenario in which the Organization for Economic Cooperation and Development, which represents the mostly advanced, democratic economies, decouples from China and all other countries align with their preferred bloc. The economic penalty after 10 years is just 0.3% of GDP for the U.S., but 4% for China, it concluded.
Construction in Qingzhou City, in China’s Shandong Province, in September.
Drop in deal making
The signs of withering entrepreneurial vigor are everywhere. China’s venture capital scene once rivaled the U.S. But this year, deal making shrank to 32% of the U.S. level from 85% in 2018, according to PitchBook. Many Chinese entrepreneurs have left or are trying to leave, especially for Singapore.
This probably doesn’t bother Xi, who wants the state, not the private sector, deciding which industries should receive capital. For example, the central and local governments have set up over 2,000 “government guidance funds” to invest trillions of dollars in priority sectors.
But Xi’s ambitions are at risk as easy credit dries up and local finances worsen. Ngor Luong at Georgetown University’s Center for Security and Emerging Technology said government guidance funds consistently raise less than planned “because of local debt burdens, tightened regulations, and other economic headwinds.” Fundraising last year fell 35% from 2021.
The same constraints are weighing on China’s checkbook diplomacy. Infrastructure loans under Belt and Road had made China the biggest creditor for numerous developing nations. Many, including Sri Lanka and Zambia, have defaulted and new lending has dried up.
Yet for all the demographic, fiscal and financial strains on China, its manufacturing sector, by far the world’s largest, hasn’t retreated. Just the opposite: this year China displaced Japan as the world’s largest automobile exporter.
Chinese brands may not be as good as top-of-the-line Western brands, but they are good enough and less expensive, and thus are gaining market share globally. The U.S. has so far stymied China’s ability to make the most-advanced semiconductors. Yet by 2026 China will control 42% of global capacity in less-advanced chips vital in applications such as appliances and autos, estimates SEMI, a semiconductor industry group.
If Xi mismanages the broader economy, China’s manufacturing prowess will persist because of baked-in competitive advantages: a large, integrated and adaptive base of producers, a reliable and modestly paid workforce and management know-how.
This gives China an important channel of global influence. Even as the Biden administration seeks to draw Asian economies closer through its Indo-Pacific Economic Framework, those same economies are becoming more tightly bound into Chinese supply chains, according to Abigail Dahlman and Mary Lovely of the Peterson Institute for International Economics. For example, the U.S. is courting India as a counterweight to China, but China’s share of Indian imports has soared from 27% in 2010 to 39% in 2021.
China’s manufacturing prowess is also a formidable military asset. Its gigantic and modernized shipyards already build 46% of the world’s ships, enabling it to churn out several new warships and submarines a year.
By contrast the U.S. shipbuilding industry, despite a century of protection, has less than 1% of world capacity, leaving the Navy to rely on just a handful of shipyards that lack the necessary workforce to handle rising demand. Deliveries are consistently late and over budget.
The shift in warfare toward cheaper, unmanned vehicles also favors China, the world’s largest producer of drones.
Dan Wang, a visiting scholar at Yale Law School’s Tsai China Center who has written extensively on China’s technology industry, said the U.S. leads mainly in knowledge-intensive technologies such as artificial intelligence and biotech rather than physical products. “Imagine a future scenario in which these countries are in serious conflict and trade stops, who do you want to bet on: the country with all the large language models and biotech and business software, or the country with large and adaptive manufacturing base? My money would be on the latter.”
Belatedly, the U.S. has woken up to that deficiency. In what might be called Chinese capitalism with American characteristics, the Biden administration is showering targeted industries such as electric vehicles and semiconductors with subsidies and protection. This has produced a spurt in factory building, but it isn’t clear enough demand will materialize to make those factories profitable.
It is also promoting friendshoring: encouraging Western companies to build supply chains in friendly countries, thereby achieving global economies of scale without relying on China. After all, the collective GDP of the “West”—the U.S., European Union, U.K., Canada, Australia, Japan, South Korea and Taiwan—is about three times the size of the “East”—China, Russia and assorted partners such as Belarus, Iran and Pakistan.
But talk of friendshoring hides the failure of the West to behave like a single bloc toward China or in economics more broadly. The U.S. has mostly proceeded unilaterally on EV subsidies and export controls. The U.S. and Europe have struggled to set aside American tariffs on steel and aluminum or agree on a common approach to screening investment in China. “It’s a very fragile bond,” said Mikko Huotari, executive director of the Berlin-based Mercator Institute for China Studies.
And hanging over allies’ minds is the prospect that Donald Trump could be re-elected president next fall. In his last term, Trump withdrew from the 12-nation Trans-Pacific Partnership, hit allies with tariffs on steel and aluminum and threatened the same for autos. Out of office, he has questioned support for Ukraine, proposed a 10% tariff on all imports and hinted at withdrawing from NATO.
“The expectation in Europe is that if Trump comes back, he will be better prepared and more sophisticated in terms of putting pressure on Europe,” Huotari said. China, he said, would exploit the resulting divisions with economic inducements to any wavering U.S. ally. Confronted with a newly isolationist U.S. and the burden of supporting Ukraine against Russia, Germany may pivot back to China because “it can’t afford to fight battles with everyone.”
Nothing would fulfill Xi’s prediction of a declining West more effectively than for the U.S. to decide that the West, as a principle for organizing military and economic policy, no longer exists.
Write to Greg Ip at firstname.lastname@example.org