The gong of distress in China’s economy has been ringing louder recently. It doesn’t suggest that the Chinese economy is about to go bust, though. It signals that a slow-growth future may be dawning. The country’s economic crisis is more structural — President Xi Jinping has now set out to shift toward high-quality growth.
Xi appears to be trying to muddle through the economic crisis to preserve his new bottom line of a national security State that holds the reins of high-tech development.
Red signals everywhere
The signs of economic distress are everywhere. According to most financial analysts, China is set to miss the official growth target of 5 per cent set for the year.
Chinese local governments have a concerning debt level, which is now as much as 92 trillion yuan (or $12.8 trillion) – making up 76 per cent of economic activity in 2022.
On 28 August, embattled Chinese property developer Evergrande’s shares plunged as much as 80 per cent — sounding alarm across the stock market. Evergrande, which was once the biggest property developer in China, is now the most indebted in the sector.
Country Garden, another big real estate developer, missed two dollar bond coupons totalling $22.5 million — the payment was due on 6 August 2023. As its liabilities ballooned to $200 billion this month, the company has now asked for a 40-day grace period on a renminbi bond maturing next week. Country Garden was once considered unlikely to fail, having the most sound financial fundamentals.
China’s renminbi trade isn’t doing well against the dollar. The offshore renminbi has depreciated to 7.6 yuan per dollar – marking a new low in investor confidence. What’s more, China has stopped publishing official employment data as June numbers suggested that the unemployment rate for the age group 16 to 24 had hit a new high — of 20 per cent.
Also read: China has achieved 2 goals ahead of G20—expand BRICS & convince India that all…
Not doing too badly
Despite all these distressing developments, there are signs suggesting that the Chinese economy may not be doing too badly.
During the 2008 financial crisis, the S&P Composite 1500 Banks index fell by about 66 per cent, after which American investment banking firm Lehman Brothers collapsed. Similarly, the index linked to European banks shed massively during the 2011 financial turndown. But the index linked to Chinese banks has gained 2.4 per cent over the past year, telling a different story from what we have seen during financial meltdowns elsewhere in the past. Even car sales are showing a positive trend despite some decline in June and July 2023.
Beijing’s problems result from a structural slowdown that came after two decades of rapid expansion. A new model of the next growth phase hasn’t presented itself yet.
Xi, though, has tried to offer a new development model – heavy on his style of politics. Called the New Development Concept, it seeks to promote high-quality growth through a domestic economic flow and the ‘interplay between domestic flow and international engagement’. However, the Chinese President has given very few details about the structural problems it means to address.
Beijing is trying to take a leap based on faith rather than economic fundamentals. Xi is trying to transform China into a high-tech economy despite the fact its large population hasn’t completely settled into a middle class yet.
China’s overemphasis on security and common prosperity has already drawn down growth to a new low.
Beijing’s State-driven investment model has been faltering for some time now, but shifting gears requires political adjustment as much as economic retooling. China’s sky-high debt today has been fuelled by State-led investment into infrastructure and real estate by entities that don’t have hard budget constraints.
The Chinese economy has failed at punishing property giants like Evergrande for their failed projects and created overleveraged financial beasts that continue to survive for years on loans.
The way forward for the Chinese economy is going to be challenging if Beijing wants to avoid an ultimate market crash.
Michael Pettis, a professor of finance at Peking University, argues that one way forward for China is to reduce the nonproductive investment in fixed assets, which allowed Beijing to boost growth numbers. The fixed asset investment model no longer returns the same levels of growth that fueled the Chinese growth model for years. The Chinese Communist Party (CCP) may need to let the market fundaments dictate who the winners and losers are rather than engage in heavy-handed interventionism, which is slowing down the growth cycle.
Also read: On Ladakh standoff, India, China talking differently this time. Something bigger is on menu
Security above all
The Chinese economy may need a liberal turn, but Xi’s mind is now set on a new type of security-driven development model that can ensure the long-term legitimacy of the CCP.
“Yet, Xi’s ideological imprint and personal power, bolstered by the wholesale replacement by loyalists of the party’s technocratic elite, make pedestrian economic growth and financial instability that much more likely,” wrote George Magnus, a research associate at Oxford University’s China Centre, in a paper titled The Economic Consequences of Xi Jinping.
Over the past decade, Xi has explained where he will likely take the Chinese economy.
“National security and development are two wings of the one body and two wheels of one vehicle. Security fundamentally guarantees development, and development is, in turn, the purpose of security,” said Xi in a 2015 speech.
Beijing knows the problem well but has no good solution; the other viable answer is that it doesn’t want to answer the calls.
The ‘muddling through’ strategy without any structural reform – or even a stimulus package – may be a politically viable option for Xi. After all, preserving the national security State is the paramount goal for the President who wants to ultimately strengthen his influence in the country.
Xi’s geopolitical ambitions have been underwritten by two decades of unprecedented growth, which will face headwinds if Beijing fails to find an alternative growth model.
The Chinese economy may not go bust, indicators suggest, but instead, get caught in a low-growth limbo like Japan. China’s political economy model – high on State intervention – is being tested for its resilience. The economic doldrums China faces today are as much a test of financial fundamentals as the political ideology that underpins Chinese society.
The author is a columnist and a freelance journalist. He was previously a China media journalist at the BBC World Service. He tweets @aadilbrar. Views are personal.
(Edited by Humra Laeeq)