Gloomy predictions about China

Image: Quyển Phạm Xuân


Skepticism about China's economic prospects has prevailed again

Nobel Prize-winning economist Paul Krugman doesn't mince words: “The signs are now unmistakable: China is in big trouble. We're not talking about some small setback along the way, but something more fundamental. The country's entire way of doing business, the economic system that drove three decades of incredible growth, has reached its limits. We could say that the Chinese model is about to reach its Great Wall and the only question now is how serious the fall will be.”

This report, however, is not current, but refers to what happened in the summer of 2013. China's GDP grew 7,8% in that “fateful” year. Over the next decade, its economy expanded by 70 percent in real terms, compared to 21 percent for the United States. China has not had a recession this century – by convention, two consecutive quarters of negative growth – let alone a “crash”. Yet from time to time, the Anglophone financial media and its trail of investors, analysts and think tanks are gripped by the belief that the Chinese economy is about to collapse.

This type of conviction emerged in the early 2000s, when it was thought that uncontrolled investment was “overheating” the Chinese economy; it strengthened in the late 2000s, when exports contracted in the wake of the global financial crisis; and in the mid-2010s, when it was feared that an accumulation of local government debt, a poorly regulated shadow banking system, and capital outflows were threatening China's entire economic edifice.

Today, the gloomy predictions are appearing again; this time they are being triggered by reportedly dismal growth numbers for the second quarter of 2023. Exports have declined from the levels they reached during the pandemic, while consumer spending has declined as well. Business problems in the real estate sector, as well as high youth unemployment, appear to be worsening China's problems.

In this context, Western commentators cast doubt on the People's Republic of China's ability to continue leveraging GDP growth. They also worry, now using more bombastic terms, about the country's economic future (“where is China going?” – asks Adam Tooze based on an article by Yang Xiguang). Adam Posen, president of Peterson Institute, based in Washington, diagnosed that China will suffer a process of “long economic Covid”.

In this vein, a certain skepticism about China's economic prospects once again prevailed.

That there are structural weaknesses in the Chinese economy is not in dispute. After two waves of dramatic institutional reforms in the 1980s and 1990s, respectively, China's economic landscape settled into a lasting pattern of high savings and low consumption. With household spending growing at a moderate pace, the increase in GDP, which has fallen over the last decade, has been supported by increased investment, made possible, in turn, by growing corporate debt.

But despite this slowdown, the current onslaught of pessimism in the English-speaking business press, half made up of distressed investors and half made up of people taken by Schadenfreude [feeling joy or satisfaction at the harm of others], is not an accurate reflection of the future of China's economy – it will be slower, but will still continue to expand; behold, its GDP increased by 3% during the first six months of 2023.

The problem may be an expression of an intellectual impasse and the imperfect conditions in which knowledge about the Chinese economy is produced and circulates in the Western public sphere.

What is essential to keep in mind about Western coverage of the Chinese economy is that most of it responds to the needs of the “investor community”. For every intervention from a public-spirited academic like Ho-Fung Hung, there are dozens of expert briefings, reports, news articles and social media posts whose target audiences are individuals and companies with varying degrees of exposure to the Chinese market, as well as , increasingly, the foreign policy and security systems of Western states.

Most analysis on China strives to be directly useful in the stock market. The flow of implicitly profit-driven interventions aimed at a small part of the population shapes the “talk” about the Chinese economy more than anything else.

Two other features follow from this. First, the most salient concerns of Western commentators reflect the skewed distribution of foreign capital in the Chinese economy. China's economy is highly globalized in terms of production and trade of goods and services, but not in terms of finance: Beijing's capital controls largely isolate the national financial sector from global financial markets.

Foreign financial capital has only a few access points to China's markets, meaning international exposure is uneven. Companies based in China with foreign investors, with offshore debt or with listings on stock markets outside the mainland (i.e. free from China's capital controls) attract attention precisely in proportion to their overseas involvements. Thus, countless news articles in the last two years have been dedicated to the saga of the lack of fulfillment of financial obligations by the real estate giant Evergrande – a company listed in Hong Kong and which has a significant debt denominated in dollars.

Many journalists and commentators may be preparing to give the same high-profile treatment to Country Garden, another struggling property developer with shares listed in Hong Kong as well as offshore debt. On the other hand, the subscriber Wall Street Journal or The New York Times You would be forgiven for not remembering the last time you read an article about State Grid (the world's largest electricity supplier) or China State Construction Engineering (the world's largest construction company) – two companies less dependent on global finance and which international investors are unlikely to lose sleep over.

The second characteristic is related to the financial industry's dependence on the art of telling stories with both a political and economic content to sell investment options. Clients with money to invest want more than an analyst's projection of the likely rate of return on a given investment product; They want to get a sense of how this product fits into the “big picture” – an overarching story of opportunity, innovation or transition in one part of the market, contrasted with vulnerability, decline or closure elsewhere.

Discussion of the Chinese economy is regularly influenced by narratives of this variety, whether “bullish” or “bearish”. Such narratives, which appear to be crafted in response to the storytelling needs of Western investors and financial intermediaries, become ammunition for public debate. The “rebalancing” story, for example, served as a compelling incentive to invest in consumer-oriented sectors of the Chinese economy – until it gradually lost credibility. Some money was made along the way, and some money lost, and in that sense the story was partly successful on the industry's own terms, despite poorly reflecting economic facts.

The fact that much of the discourse on China's economy takes shape in response to investor interests may also explain its susceptibility to short-term sentiment reversals. As a general rule, the performance of financial markets is more volatile than that of the real economy, and in the case of China, it is primarily the former – to which foreign investors are more exposed, albeit unevenly – that drives perceptions of the latter. .

Hence the strong mood swings from high to low and vice versa, from one financial cycle to another. Fluctuating in part with the vagaries of market sentiment, Anglophone commentary also lacks consistent and credible criteria for evaluating China's economic performance. How much growth is enough? What kind of economic expansion would be necessary for China not to enter a “crisis”?

In 2009, when the Chinese government unleashed a spectacular wave of bank lending to stimulate activity in the aftermath of the global financial crisis, it was widely believed that growing the economy at 8 percent was necessary to avoid mass unemployment and social instability. . That benchmark has now conveniently disappeared from the view of the Chinese news-hungry public; no one in the West today would dream of saying that China should aim to grow at 8% a year.

And is GDP growth itself an adequate metric of economic strength? The importance that Chinese authorities attach to GDP performance has declined in recent years. The official target for 2023 is approximate – “around 5 percent” – providing some wiggle room, while the Fourteenth Five-Year Plan (2021-2025) dispenses with a global GDP target altogether.

In addition to the multifaceted standards for evaluating performance, there is also a degree of confusion about how to interpret key developments in the Chinese economy, especially in relation to the intentions of policymakers. The difficulties in the real estate sector are an example of this. The slow-motion collapse of the excessively indebted company Evergrande has been repeatedly portrayed in the Western media as a calamity; According to this view, the entire Chinese economy is waiting for this bomb to explode and for the debris to finally fall on it, as if it were a “Lehman moment”.

This overlooks the fact that the Chinese government has been deliberately preventing highly indebted property developers, including Evergrande, from accessing easy credit since the summer of 2020 – a move since referred to as the “three red lines” policy.

Of course, any lack of compliance with obligations and thus, as a result, large-scale corporate restructuring is not desirable in itself. But it seems that failures like Evergrande's were treated by Chinese authorities as the price of disciplining the real estate sector as a whole and reducing its weight in the economy in general. Although the property recession, with investment set to decline sharply in 2022, has weighed negatively on China's overall growth performance, this appears to be the consequence of a concerted attempt to “realign” the sector – whose shrinking share of economic output total, even at the cost of GDP growth, can well be described as a positive development.

A starting point for a more balanced approach to the Chinese economy is to place the current situation in a long-term perspective. China's economy was profoundly transformed in the 1980s and 1990s. As a result of the waves of reforms that defined these decades, agricultural production moved from the collective to the household form; state-owned industries were converted into profit-making enterprises; the allocation of goods and services and labor has been completely commodified; and a powerful private sector was born, which expanded rapidly and consolidated.

Since this era of intense institutional restructuring ended in the early 2000s, China's GDP has more than quadrupled in real terms, but the country's fundamental economic structure has remained stable, both in terms of the balance between state-owned enterprises and capital. private sector, such as the precedence of investment over consumption. In this context, cases of significant changes – technological updating, expansion of capital markets – have been slow.

The decline in GDP growth is itself a constant issue and the essential aspects of the current configuration are likely to persist for some time. China’s economy is not a “time bomb,” as Joe Biden boldly opined last month, nor is it – an overused phrase – “at a crossroads.” Chinese bulls in the West may well continue to turn into Chinese bears and vice versa in the coming years as the Chinese economy advances indifferently.

Nathan Sperber is a postdoctoral researcher at the Center européen de sociologie et de science politique at the Sorbonne.

Translation: Eleutério FS Prado.

Originally published on the website Sidecar da New Left Review.

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