Chinese economy under internal & external pressures

Chinese economy is not now what it used to be, the economic power house on which the world economy depended for its spectacular growth before 2020 pandemic years. The prolonged shutdown of the society and particularly the economy, more protracted than other countries has left a trail of economic devastation that has made the once vibrant engine of growth move gingerly, out on a limb. The lacklustre performance of the economy has insidiously reduced the country's once much vaunted engine of growth. China's economy last year grew at one of its slowest rate in more than three decades, official records showed in the second week of January this year. After suspension of economic activities during the Covid years from 2020 through much of 2023, Chinese economy has recently been battered by crippling overheated property problem, sluggish domestic consumption, global turmoil and American-led restrictive policies of Western countries under the guise of first 'de-coupling' and now 'de- risking' that has affected its hitherto robust growth of trade and foreign investment. China's National Bureau of Statistics revealed that gross domestic product (GDP) expanded 5.2 per cent to hit $17.6 trillion last year. This figure is better than the 3 per cent recorded in 2022 when strict zero-Covid curbs destroyed economic activities both in the public and private sectors. But the figure masks the weakest performance since 1990, excluding the pandemic years. While 5.2 per cent growth in GDP is much better than the growth rate in America and the countries in the euro-zone which each expanded around 2 per cent in 2022 it is well below the levels of around 6 or 7 per cent chalked up in the 2010s.
After lifting its draconian Covid shutdowns by the middle of 2023, China set a growth target of 5 per cent last year. The economy enjoyed an initial post- pandemic rebound, but ran out of steam soon as lack of confidence of business firms, including manufacturing and households hit consumption. With trouble in the property market, investment in the sector has fallen and much of it is highly leveraged. As a result the economy is now more dependent on the manufacturing and service sector. Statistics last month (December, 2023) showed deflation continued for the third month in a row, and that has deepened reluctance of consumers to spend.
Externally, developments are not conducive to help kick-start the economy. Exports, historically a key growth driver, fell last year for the first time since 2016 because of restrictive policies adopted by America and EU countries after the Ukraine war broke out. The stuttering global economy has compounded China's struggles to kick- start growth of the stalled economy.
With this thumbnail description of China's present economic woes, elaboration of some of the major factors, domestic and external, constraining the recovery of the economy to pre-pandemic levels and government intervention made so far and are on the cards can be made.
Sputtering growth rate in recent years has driven away foreign investors from portfolio investment. As a result stock markets have slumped to multi-year lows as confidence in the world's second largest economy has evaporated and foreign money has fled. Investors who were hoping that Chinese government would come riding like the knight in white armour of fairytale to rescue the damsel in distress (the Chinese economy) have been disappointed. They now realise unless a bigger crisis overwhelms the economy the Chinese authorities are not likely to more than tinker the economy with band aid measures. On the other hand, further tightening the financial sector (banks) with more regulations regarding adding to liquidity in the market with fresh loans, as has been seen in recent months, has further eroded investor's confidence. Investor's interest has disappeared as the market has finally woken up to the fact that the government will manage the economy for the long term and not focus on short term market movements. Boosting the stock markets with availability of funds and other stimulus measure does not appear to be a priority in the macroeconomic policy package any time soon. Investors remember that Chinese authorities in the past rolled out stimulus measures in favourite sectors like infrastructure to such an extent that it has now become a dead weight. The central government has now asked heavily indebted local governments to delay or halt some state- funded infrastructure projects. But the government has not ignored the need of small businesses for funds at cheap rates. It has disbursed $740 billion in cheap loans to businesses as banks raise concerns about credit risk. But China's financial regulators are wary about using targeted stimulus measures as these go against their policy decision to commercialise the credit operation through banks. There may be a mismatch between the policy makers at the top and the financial regulators operating below at ground level.
On the issue of portfolio investment in China, the United States (US) and Chinese financial authorities have taken regulatory steps that are not congenial for smooth and quick issuance of IPOs for Chinese companies, particularly in respect of mentioning the 'risk related factors' in the notice by issuers (banks, investment firms). This too has dimmed the prospects of foreign investment in China.
Concerned at the flight of foreign capital, Chain's financial regulators invited some of the world's biggest investors at a meeting in Beijing in July last year, seeking to encourage foreigners to keep investing in the world's second biggest economy. The meeting took place at a time when global investors and banks were warning that confidence is waning in China's economic outlook. It was a time when the country's post-pandemic recovery was losing steam and Sino-US relations were at a low over national security issues, including tensions over Taiwan, the US export bans on advanced technologies and over contested China's state-led industrial policy. But unlike what most of the economists in the West think, China's economic problems are not structural. They stem from the protectionist policies of America and now followed by European Union (EU) countries at its behest. The protectionist policy is fuelled by worries about China dominating the world economically, becoming number one in the economic league. This is anathema to America and some of its close allies on ideological and psychological ground. Trump's 'America first' policy was essentially to challenge China's ascendancy as an economic giant accumulating surplus in its trade transactions with almost all countries. It was under Trump's watch as America's president that the concept of de-coupling from Chinese economy was coined. De-coupling meant complete dismantling of existing trade and investment relationships, severing supply chains and establishing new economic relationships elsewhere. While America succeeded in cajoling, sometimes coercing, American companies to shift their operations from China to either back home for which sufficient incentives were given, the EU countries were not so enamoured of the idea and easily persuaded. The breakout of Ukraine war in 2022 convinced EU countries that trade and investment relations with China could no longer be 'business as usual'. But they did not want to severe all economic relations with China as they did with Russia. The new relationship was anointed with the nomenclature of de-risking, a more nuanced approach that discuses on mitigating specific risks associated with economic engagement in particular sectors over certain goods and services. It involves diversifying supply chains, identifying alternative sources of goods and services and implementing measures to reduce exposure to protect potential disruptions. But for many companies, particularly multinationals, economies had become too intertwined even to de-risk, that is to reduce the level of engagement. American example of giving subsidy to entice companies away from China has not been followed yet by EU countries though they have agreed to the principle of de-risking. Restrictions on export of strategic technologies by America and Europe have already hurt the micro chip and computer industries in China and those may be followed by other sectors considered strategic by America. These measures along with ones dealing with alleged cases of dumping, as in the case of solar panels and electric vehicles, have come in the form of fresh headwinds for Chinese economy .While China can fine tune its domestic policies to address problems of tardy investment, debt overhang and consumer expenditure, it has a small leeway in tackling the external challenges coming from America and Europe. As a result its share in global trade and investment is likely to decelerate. But this will also mean diminution in the volume of global trade, bringing down the rate of global growth. Global economy, instead of jumpstarting after the Covid debacle for a year and a half (for China two years), will have anaemic growth lowering standard of living everywhere.
It is a cliché to say that desperate times require desperate measures. China, faced with sluggish economic growth, has made policy reforms in earnest, from addressing internal debt crisis to resolving lower investment following depressed consumption. The central government has asked local governments to halt or reduce infrastructure projects to reduce the growing burden of debt. It may also bail out the highly leveraged housing sector where completed projects are going a begging for buyers instead of allowing them to become bankrupt. Experiencing control on strategic raw materials from America, China has diversified the sources of their procurement. Some of the powers formerly exercised by the people's Bank of China (PBC) have been taken over by a revamped financial regulator as the country resets its growth model. Far from pushing the central bank aside for alleged market liberalisation, the central government has changed its role to contend with slow post- pandemic growth and a mounting debt crisis hitting the property sector and the local governments. This may have alarmed countries in the capitalist world about further tightening of governmental control over the economy. But the West, led by America, should realise that China will not abandon its strategy of pursuing development based on 'socialist market economy'. The 'socialist' component in the strategy is ironclad and it will not be sacrificed in the name of reform.
The problem with the West, particularly America, is that it wants to see every country in its own image. When a 'socialist market economy' beats it in its own game of 'growthmanship' using a slightly different playbook, it gets the jitters. The West should learn to live in peaceful co-existence with different systems of economies with a level playing field. The major headwinds facing China are not of their own making and as such prodding them to reform is one sided. The West should do its part to keep China economically hale and hearty to continue as a partner in progress.

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