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October 15, 2024 - 5:00pm
There’s a fascinating tug of war taking place in China at the moment between the government and the markets. Its resolution will do much to determine the future course of the world economy.
After decades of spectacular growth, the Chinese economy recently slowed into the “middle-income trap” — the point at which a rising economy has built all the industrial capacity it needs. Amid the slump, prices are falling as the country edges towards outright deflation. It needs to shift to a new model based not on adding more capacity, but instead improving product quality for a growing consumer market.
Everyone agrees China needs a stimulus programme to move out of this trap. The disagreement is whether it should be a demand-stimulus or a supply-side stimulus. The view in markets, shared by most economists, is that China’s problem is insufficient demand. Its economic development was built upon using cheap labour to produce exports for the global market, but its model could last only as long as the rest of the world was willing to buy cheap Chinese products. The consequent deindustrialisation of other countries has led many to start raising barriers to Chinese imports, which means its excess supply must be mopped up internally.
In principle, there’s plenty of scope for that. With nearly half the country’s annual output set aside in savings, the government could engineer a reallocation of money from investment to consumption and thereby kickstart the economy. The problem is that it doesn’t want to. Xi Jinping’s determination to preserve the economic leadership of the Communist Party has led him to prioritise supply-side stimulus. The aim is to reallocate investment away from property and infrastructure and towards the new industries that will dominate the future, such as renewable energy and artificial intelligence.
But sticking with this strategy, which is important to the ruling party’s self-image, may mean sacrificing its annual growth goal of 5% — at least for this year. Markets, knowing how talismanic that figure has become to the government, think it will eventually cave and deliver a big demand stimulus. There’s increasing official communication from Beijing that the government intends to borrow in order to revive the economy, and investors are standing by while awaiting the details. Until they receive news of a spending splurge, they will probably stay there, and the Chinese stock market will remain in its funk, some 40% below its 2008 peak.
Regardless of whether Xi sticks to his guns, the impact of this tug-of-war resolution on the world economy could be huge. A demand-stimulus would raise consumption across the board in the world’s second-biggest economy, which would help Western economies emerge from their own sluggishness. In contrast, a continuation of supply-side stimulus would leave them cold. By continuing to flood the world with cheap goods, including electrical vehicles and solar panels, China could further pressure the Western manufacturing firms which are struggling to compete, and whose profits are already being squeezed.
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SubscribeBelt and Road initiative ( BRI) showed the disingenuous nature of any global CCP ventures.
The author underestimates the ability to debt trap in a much more direct fashion than the Marshall Plan through such shrewd CCP moves.
Indeed the entire RE and EV push has a sinister underpinning if linked to CCP origins.