Warning that the Chinese economy is showing signs of exhaustion with a growth of 4.7% in the second quarter of 2024 would seem an exercise in irony. But concern is growing in society and is putting market analysts and international observers on the same wavelength. The priority of the country’s president, Xi Jinping, is economic security, the transition to a high-quality production model that makes China a technological, sustainable and advanced industrial power. A challenge to which, on the other hand, its emerging and high-income rivals aspire, and which has left the world power without much strength.
The situation tends to highlight problems that are beginning to be structural, such as the real estate crisis or the aversion to spending among Chinese consumers. For the first time, citizens are suffering the harsh consequences of a deflation that is beginning to drag on and is combined with other factors such as capital flight or the phenomenon of overproduction.
Every paradigm shift has its relevant telluric movements. Some, difficult to detect and resolve. Especially if it is subject to the geopolitical storms in which Xi acts, as could not be otherwise, as a star agent. Xiaojia Zhi, an analyst at Crédit Agricole in Hong Kong, recently explained to Bloomberg the crossroads that the Chinese leader seems to have entered, especially given the strength that Donald Trump’s candidacy for the presidency of the USA was still showing a few weeks ago. Although the emergence of Kamala Harris has raised great hopes over time, the Chinese leader has been notable for his constant message of opposition to the Biden administration. This scenario “has inspired in Jinping the desire to undertake additional efforts to stimulate domestic demand in order to contain foreign risks before a hypothetical Trump 2.0 mandate.”
A note to investors from Duncan Wrigley, chief China economist at Pantheon MacroEconomics, highlights the message from the recent Third Plenary Session of the 20th Central Committee of the Communist Party of China (CPC), at which Xi served as general secretary. In it, he said, “he reinforced his goal of promoting high-tech, industrial-quality manufacturing as the foundation for sustained long-term productivity-driven growth; but he offered no formula for boosting consumption or business investment.”
The reforms aimed at consolidating the growth model based on domestic demand, which the Chinese president himself had promoted over the last decade to adopt the model of the industrialized powers, “have disappeared”, as have “urgent policies of transformation and revitalization of the real estate market” and the most strategic one of “creating a real welfare state” in the country, Wrigley said.
Overcapacity and weakness
The lagging housing sector, about to enter its third year of upheaval after the crisis and the subsequent bankruptcy of developer Evergrande, continues to vex economic authorities. Residential construction in the country’s major cities fell in June for the 13th consecutive month, amid low confidence in the recovery and the fifth straight quarter of deflation, a scenario not seen since the country joined the World Trade Organization (WTO) in 2001. Worse still, says Raymond Yeung, an economist at Australia & New Zealand Banking Group, retail sales, or daily household consumption, “remain in a state of lethargy.”
“Politics concentrates and absorbs attempts to restructure the economy and adds risks to preventive measures, such as preserving financial stability,” says Jacqueline Rong of BNP Paribas, for whom a substantial part of the solution would come from a combined action of economic authorities, with the deployment of new fiscal and monetary stimulus measures, rate cuts. And he sets a date: “It is possible that throughout the summer, after the Politburo meeting, this double incentive for dynamism could occur.”
Chang Shu, chief economist at Bloomberg Economics Asia, believes that the pace of the second quarter predicts a more complex recovery than expected due to the persistent slowdown in consumption and services in June, as well as industrial production that, despite its slight increase, remains at historically low levels. “Its resuscitation – agrees the BNP Paribas analyst – will not be easy without fiscal and monetary steroids.” Especially as long as internal and external geopolitical uncertainty is not resolved.
And it remains to be seen whether the surprise interest rate cut approved by the People’s Bank of China on July 22 will be enough. In its first adjustment in almost a year, the Chinese monetary institution reduced the rate applied to one-year loans (the benchmark for consumer loans) by ten basis points (from 3.45% to 3.35%), while the rate corresponding to five-year loans (the benchmark for real estate loans) was set at 3.85%, instead of 3.95%.
“Delays in reforms are undermining confidence and generating uncertainty,” said Harry Murphy Cruise, an economist at Moody’s Analytics. “China’s big policies continue to revolve around economic security and a shift toward innovation and industrialization.” But the economy “is struggling” and Xi has “other priorities.”
In The economist They stress that China has a serious problem of overcapacity. A warning that US Treasury Secretary Janet Yellen conveyed to Beijing during her last visit to the Asian giant last spring, and that the EU underlined through Ursula von der Leyen before Xi himself in Paris, during his subsequent official visit.
Washington and Brussels insist that this is a structural problem and that it mainly concerns their manufacturing sector. Of course, the transatlantic partners have used this diagnosis to justify their tariff increases; particularly on their electric vehicles, under the accusation of destroying jobs and domestic industries. Despite this, Chinese steel exports, the first of the products on which Donald Trump imposed higher customs duties after coming to the White House, increased – measured in tons – by more than 28% in the first quarter year-on-year. and its sales of electric cars by almost 24%.
Fewer start-ups and unicorns to boost innovation
At the same time, the concerns of Premier Li Qiang, who has become the architect of this change in economic direction, are to restore the lost confidence of investors, who have transferred large capital flows from Hong Kong to Mumbai this year, and to transfer their results to Chinese companies are slowing down private investment. Those that arise from their cash flows, without the protection of billions of dollars of subsidies granted to strategic sectors such as technology, manufacturing or renewable energy.
Xi himself questioned stopping the creation of start-up in June at the Council of State, to learn about one of the current issues that concerns him most: the loss of weight of companies and a relative aversion to risk that he says he has detected among investment funds operating in China.
Another fact that shows the veracity of the Chinese president’s analysis is the decline in the unicorn census. Companies with a valuation of over a billion without a stock market presence reached the level of those in the United States between 2016 and 2018, more than three times that of the rest of the world. In 2024, however, they will be half of those of the Americans.
The relative paralysis of the global economy only partially explains an underlying problem of approach that disrupts Xi’s dream. The British weekly explains it eloquently: the Chinese president – it says in a recent analysis – “is extremely worried about black swans (unexpected crises) and gray rhinoceros (major problems ignored)”, a sign that he is aware of the reality of an economy that has not yet taken off on its own and which also creates tensions for the development of the quality production model desired by the president.
The horizon of prosperity drawn by technological innovation, the driving force behind the modernization of manufacturing industries and renewable energies, requires “high technical and scientific development and qualification”, according to the Chinese president himself. But for it to stimulate productivity and therefore the competitiveness of the economy, it must be more balanced to avoid falling into the temptation of self-sufficiency.
This is what the official magazine of the Communist Party claims, Qiushiwho believes that the government’s management will reach that stage of quality development that the president is talking about. Although he admits two drawbacks: one external, the geopolitical tension, which can break globalization, and another internal, which implies that the Executive “will have to make fundamental changes in the Chinese economic and financial agencies and institutions”, responsible for managing this “long and winding productive turn”, as described by the governor of the People’s Bank of China, Pan Gongsheng. The monetary authority recognizes that in the meantime, investors “will put pressure on themselves to make quick profits”.
Scott Kennedy, adviser to the president of the Center for Strategic and International Studies (CSIS) on economic affairs in the Asian giant, outlines the possible knock-on effects. “It is not true that solving the complex puzzle of real estate and imbalances in the economy is not a source of tension or concern.” But the impression is beginning to permeate Chinese society that Premier Li Qiang is not at the level of his predecessor, Li Keqiang, who died suddenly, and that his number two and head of the economy, He Lifeng, “is much less qualified.”
The problem is that doubts have been created about his leadership in resolving conflicts of interest between shareholders, investors, the monetary authority and de facto powers such as highly indebted municipalities, as well as with businessmen and agencies that must coordinate and manage productive sectors. At the same time, the question arises as to whether Xi will have to play on a global chessboard that is more or less benevolent or aggressive towards Beijing. All this – Kennedy concludes – will determine the level of success or failure of economic policy and possible drastic decisions, which would begin with the replacement of the current cabinet.
