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Will China launch its own Marshall Plan?

Much of the future of the world economy depends on this man. Credit: Getty

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.

But it could also increase investment in developing countries which have trade deals with Western countries, enabling Chinese firms to get around tariffs. In thereby raising incomes in recipient countries, it would further boost demand for Chinese products.

It could conceivably turn into a sort of CCP Marshall Plan, making the country more central to the most dynamic part of the world economy and laying the foundation of its future ascendancy. There’s no guarantee it would work. But if it did, it would challenge economists to reconsider everything they thought they knew about the middle-income trap. What seems clear, though, is that the future course of the world economy depends substantially on the outcome of this battle of wills.


John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).

jarapley

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Sayantani G
Sayantani G
28 days ago

Belt 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.

RM Parker
RM Parker
28 days ago
Reply to  Sayantani G

My thoughts exactly. One only needs to look at how the CCP views and treats its own citizenry to gain insight into likely strategies, short and long term.
The gaming and exploitation of globalised trade relations should have been instructive, but we were content to have access to cheap consumer goods, and our elites were becoming addicted to cheap labour costs with minimal compliance requirements. Thus have we all been cheerfully blind to the looming threat that the CCP poses, to its own population first and then to the world at large. This isn’t exactly news, and it isn’t typically discussed in the news either.

Rocky Martiano
Rocky Martiano
27 days ago
Reply to  RM Parker

Exactly what threat does China pose to the world at large (outside of Taiwan, which is arguably not part of the world at large)?

0 01
0 01
27 days ago
Reply to  Sayantani G

I don’t think BRI was a debt trap despite what a lot of people think, I think it was one part vanity project and one part pressure valve to get rid of overcapacity in the Chinese economy that was an economic burden. The problem is that these projects the BRI was involved in were economically unsustainable in the long run and the result being that China will not get any of its money back despite the fact that they now control many assets because none of them will ever make a profit. They may also control important infrastructure as a result, but many nations have been burned by this and they now resent them for it. Nations will now be less trusting of China when it comes to these types of projects. There has been a rise in anti-Chinese sentiment as a result of the BRIs failures because many Nations were enthralled in corruption scandals or had debt issues as a result of its failure. We should take comfort in the fact that it’s failed, but we should fear the incompetence that was involved in this. The fact that they did these massive projects that didn’t amount to anything and wasted hundreds of billions of dollars in the process shows how incompetent the regime can get at times, Incompetence can be dangerous onto itself.

Douglas Redmayne
Douglas Redmayne
27 days ago
Reply to  Sayantani G

Far too simplistic. If China wished to used debt traps to further its global ambitions it would have sold off all the US and UK government issued bonds and sterling and dollar foreign exchange reserves it accumulated as a result of quantitative easing in order to keep the renmimbi low. This allowed western governments to continually increase demand by running deficits while the Chinese people effectlively paid the bill because the CCP feared a middle class. Milton Friedman’s aphorism “there is no such thing as a free lunch” failed to forsee this.

Sayantani G
Sayantani G
27 days ago

You obviously are not familiar with happenings in South Asia- Sri Lanka in particular.
CCP has a distinct debt trap policy which involves leasing of strategic assets like Hambantota Port or several other such carve- outs in different parts of South East Asia.
The Chinese policy in the West is more deceptively guarded- but the insidious take- over of huge segments of Western markets especially in the ” Green” policy paradigm is more lethal than supposed.
Sometimes do a granular audit of how much of Wall Street is invested in CCP assets..

M To the Tea
M To the Tea
28 days ago

It is important to compare the basic underlying economic mechanisms of China and the West. China is more supply-side focused, operating in a “fix the roof before it rains” manner, meaning they prioritize savings and long-term investment. In contrast, the Western, particularly U.S., economy is driven by consumer spending, with less emphasis on saving, and is more demand-side oriented. This article seems to wish for China to become more like the West by aggressively boosting demand, without fully considering the cultural importance of saving in China.

0 01
0 01
27 days ago
Reply to  M To the Tea

China is anything but that, The real estate bubble is a pretty good example of this, which itself heavily built on debt. There’s also the municipal debt crisis that’s brewing within the provinces and It’s a ticking time bomb The key man’s result of stimulus spending that produced worthless infrastructure and developments that had no economic rationale behind them save to pump up economic growth. The fact that they’ve been propping up state Enterprises that are inefficient and unprofitable and putting emphasis on manufacturing instead putting greater emphasis on domestic consumption just to keep people employed to ensure political stability, thus they have not been able to move away from manufacturing export-based economy. You would think with these problems China would be encouraging innovation and wealth creation by making the economy more freer, instead they’re not doing that and they’re doing the direct opposite of that, they’re tightening the screws with their crackdowns on large businesses because it has this all consuming paranoia that plays into everything. All these problems were exacerbated by the regime through their meddling, They are just as prone to short term thinking and irresponsibility as their Western counterparts, probably even more so due to a lack of transparency and accountability and the paranoid nature of the regime that sees threats everywhere and the fact that has such a high degree of power over the country and the party infiltrates all aspect of life.

Steve Gwynne
Steve Gwynne
27 days ago

As I understand it, China is effectively under austerity conditions trying to balance its internal municipal budgets and growing budget deficit with trade surpluses being spent on stockpiling gas, oil and grain as well as purchasing Western bonds in order to devalue their currency for export gains.

So as I understand it, you are right, does the CCP invest in its domestic economy and stimulate demand or does it tighten its grip on consumer spending with an export model based on renewables and AI including the production of metallurgical grade silicon and steel.

The problem with either strategy is that stimulus requires more borrowing or gilt issuance on the hope that either domestic savings will be released or Western governments proceed with huge renewable energy and data centre projects with upfront costs added to electricity bills and thereby reducing discretionary household income.

The reality is that China’s export model is highly dependent on Western states taking on more debt with the hope that renewables and data centres pay dividends. Thus this strategy relies on the kindness of stranger’s debt which is increasingly becoming unsustainable and may end up with a dramatic debt crunch.

So it would seem more prudent to stimulate domestic consumer demand with interest rate cuts which CCP is currently doing. Increasing a sense of prosperity for its own citizens would seem the obvious choice if CCP wants to retain legitimacy within what are vast areas of undeveloped hinterlands.

UnHerd Reader
UnHerd Reader
27 days ago

This is the news on China’s stock market:
4 reasons China’s blistering stock rally has another 20% to run, Goldman says div > p:nth-of-type(2) > a”> div > p > a”>Filip De Mott Oct 7, 2024
Latest news on China’s stock markets. Blackrock upgrades to ‘buy’. Bloomberg recomends overweight in China. Most global investors are bullish on China (except the China haters). This September China had best stock market week since 2008.
John in the article says ‘China stock market will remain in it’s funk’. Sounds like words from writer who knows nothing of current China.
Xi’s economic policies are fluid. Just recently he has given the power of financial policy and planning re: property to the level one cities. Tianjin and Guangzhou have reacted quickly with Shanghai giving it’s plan this week. All are regional and different. To say Xi’s efforts to control economic leadership you do not understand the economics of China and the fiscal freedoms of the provinces and cities.
Sorry John please do your homework. Bloomberg China Open Business channel does a live daily broadcast from Singapore with live updates from all the SE Asian stock markets. Good insights into the very current geopolitics, as well as the daily business news.