China is facing its largest economic crisis in 40 years, a period over which the West experienced multiple crises and learned how to forecast and navigate them a little better each time. Lacking experience, the Chinese government and people are uncertain how they may resolve the underlying economic issues. The present actions, even if clumsily executed at times, are better than the inaction of the past eight months.

China makes moves in equity and financial markets

In concert with real-estate sector initiatives, Chinese financial regulators triggered a 30% stock market rally last month by encouraging banks to lend to listed companies so they could buy back stocks and allowing qualified institutions to secure low-interest loans from the People’s Bank of China to purchase shares. Retail investors also borrowed heavily to buy shares, and there are rumors of some even selling their apartments in the hope they would reap the windfall of a lifetime. The rally has been fragile, but more reforms and stimulus are to come.

If the China Securities Regulatory Commission committed to improving the quality of initial public offerings (IPOs) and the accuracy of earnings reporting, governing bourses more rigorously and cracking down on corruption, China’s capital markets would expand swiftly and supply much-needed capital to businesses and investment options for citizens. It was fine to use state-owned enterprises to trigger recovery, but Beijing must give private investors more confidence to invest in capital markets for the present trend to turn into a bull run.

The Chinese government can adapt to the role of capital markets regulator, rely less on intervention and allow companies representing China’s present and future growth — such as privately owned technology and service firms — to list. They must disincentivize those who see IPOs as one-off capital-raising events without long-term obligations to investors and others who bribe listing authorities and accounting firms to help create illusions of value while obscuring risks and liabilities.

Beijing must reform its capital markets to augment the strength of its manufacturing sector, which in itself cannot compensate for the role real estate fulfilled in the past of driving domestic growth and retail investment. China’s recent stimulus focus indicates Beijing does recognize it must reform its financial systems, especially its capital markets, and China may be on the cusp of a capital markets revolution.

The fundamentals are compelling. China has more banking assets and foreign exchange reserves than any other country. Its bond, stock and insurance markets are second only to the US. Despite quality and governance issues in its capital markets, Chinese equities do not reflect the strength of an economy whose factories contribute more than 30% to global manufacturing. Chinese equities are arguably the most undervalued in the world, and with Chinese households holding less than 8% of their assets in shares (as opposed to the US average of 48%), retail investors will be a crucial spur in any expansion of capital markets. The Chinese government values social stability above all else, and as only radical capital market reforms can ensure Chinese households’ share portfolios are not exposed to inordinate risks, it is likely to undertake such reforms, which in turn will attract foreign portfolio investment.

It is a misconception that one man makes all economic decisions in China and that the state acts as a monolith, deaf to the masses. There appears to be an intense debate in Beijing on how to best restore confidence and growth, and if an initiative from one part of the government fails, another will launch an alternative. In the West, governments change swiftly while policies are usually slow to change. In China, administrations change slowly, yet policies may change swiftly once the government understands an issue.

Targeted stimulus can help

On the other hand, Western politicians and regulators frequently announce policy changes by speaking directly to the public, explaining the reasons and benefits. In China, the government tends to reveal initiatives incrementally as it instructs its own numerous, far-flung institutions regarding new policies’ functions and how cadres should implement them. Now, more than ever, the leadership needs to talk directly to the people and explain how the multiple new and upcoming stimulus packages will benefit individual citizens.

Recent stimulus measures applied in individual cities may be harbingers of national policies to come. The Beijing city government, for example, is offering to reimburse money spent by lower-income households and retirees on apartment renovations, particularly to accommodate those with diminished mobility and disability needs. Many in the wider population share the anathema under which the government holds direct cash handouts, seeing them as a weakness of developed economies causing low productivity and competitiveness. Yet the state needs to offer reimbursements for extra health and education costs until it has reformed these sectors and lowered their cost to citizens.

If the Chinese government issued time-constrained, non-transferable vouchers to its citizens to help them pay for essential services, it would boost consumption significantly and release some of the money householders now hoard for future welfare needs. Basic medical care and education are free or at least inexpensive in China, and these have been extended to even the most remote regions and are better than those offered by most developing countries. But the costs of more complex medical treatments increase exponentially and are out of reach of the majority of Chinese people.

The Chinese government has begun reviewing the status of the 170 million domestic migrant workers and should begin allowing those employed gainfully to transfer their hukou (residency permits) to the towns where they presently work beyond the few recent experiments in selected cities. In becoming residents, these former migrants would benefit from local health and education services, motivating them to buy homes and generally consume more. Domestic migrant workers save more than city residents because they must pay for the social services local residents receive gratis. Such a move would add at least 1 trillion renminbi ($140 billion) annually to the national GDP.

Over 900 million Chinese people earn less than $300 per month. With some coastal cities possessing an annual per-capital GDP of over $35,000, the income disparity is striking. On the other hand, China’s developmental potential is considerable. Perhaps the current administration needs to reflect on the capacity for political and social risk of their predecessors and apply some of their radical thinking to today. There are a few signs the leadership is at least trying to do so: The slogan for the current slew of stimulus measures is “bold and steady,” a phrase used by Deng Xiaoping in the early years of economic reform.

China’s geoeconomic position is precarious

The air of geopolitical insecurity among ordinary people will take more than a recovering economy to change. Foreign direct investment is 7% of what it was pre-pandemic, and foreign business travelers and tourists are few. Throughout the lead-up to the US elections in November, Republicans and Democrats have threatened even more punitive tariffs and strategic containment when referring to China. Chinese people are beginning to understand how politically isolated they have become from a West that once treated their country with respect or at least curiosity and whose businesses were keen to realize the economic opportunities it offered.

Hope that the European Union will not follow the US in trying to block China’s economic growth is also waning. Chinese people think the EU’s choice to place tariffs on Chinese EVs is unjust, revealing to them the harsh reality that Europe is as much, if not more, a trade fortress as a source of global partnerships and prosperity. They point to the fact that European automobile companies have been dominant in China until recently and that three foreign companies — Volkswagen, Tesla and Toyota — remain in the top ten domestic sedan manufacturers. It is reasonable to hope, however, that as the Chinese economy recovers, foreign investors will return and more companies will come to take advantage of China’s growing consumer market.

Some early signs of economic recovery are encouraging. At 1 trillion renminbi (6% of GDP) the stimulus to date is the largest in China’s economic history and is just the beginning. The government is likely to do more, now that it seems to know it has no choice but to fuel confidence and consumption wherever it can. It understands this is needed to prevent a deeper downturn this year and avert a full-blown economic crisis in the near future.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

The post China Watch: Beijing’s New “Bold and Steady” Economic Stimulus appeared first on Fair Observer.

Italy has just announced it will withdraw from China’s Belt and Road Initiative (BRI), complaining that trade and investment have benefited China inordinately, while damaging the Italian economy.

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Brussels has called for an investigation into subsidization in the Chinese electric vehicle sector as European automobile companies are losing market share to cheaper, more advanced Chinese electric vehicles (EVs). Beijing wants to further the China-EU détente to maintain Europe as some form of counterbalance to its dependence on the US market and imports of US technology, but the barriers to this are high. European commissioners are demanding greater access to China’s domestic market while, in step with the US, banning exports of dual-use (civilian/military) technology to China, including advanced semiconductors, cloud computing, and artificial intelligence.

Meanwhile, European public opinion towards China has continued to sour due to China’s choice not to condemn Russia’s invasion of Ukraine. Many in Europe and the West do not consider China’s own need to maintain reasonable relations with Russia, with which it shares a border of nearly 4,200 kilometers (2,600 miles). As the war in Ukraine drags on, it appears that each side is too strong to lose and yet too weak to win, and European politicians will lean more towards Washington than Beijing.

The EU is unlikely to try to decouple economic links with China as ardently as the US, and European companies will invariably resist trade restraints. The global economy will suffer profoundly if China becomes estranged further from the world’s two great trading blocs. It is in the interests of smaller trading nations to resist pressure to pick sides and avoid adding to the larger players’ intemperate rhetoric.

Despite all of the considerable challenges, China will continue to offer the strongest and most investable market for the rest of the decade. All those nations, firms, and people around the world who benefit from peace and stability should not treat disengagement and conflict as our unavoidable future.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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The drought is over, mate. We can sell our wine in China again. Albo’s visit was the first step in a new era. And you blokes shouldn’t read too much into the subs and all that AUKUS stuff. We only care about the Pacific because you do. The stand-off was all about nothing.

— Australian wine company sales manager

Easy for you to say. The ‘subs’ you mention will get deployed off the Chinese coast. How would you feel if we sent nuclear-powered submarines with ballistic missiles to cruise in international waters just off Perth?

— Chinese distribution manager 

China President Xi Jinping and US President Joe Biden were motivated in part by a mutual requirement to repair the economic damage resulting from prolonged political estrangement and the imposition of trade tariffs. Biden asserted that the US was not trying to decouple from China, perhaps acknowledging tacitly that attempts to do so have been unsuccessful. Both economies need each other’s markets to ensure future growth. Yet there are powerful people in Beijing and especially Washington who are prepared to mortgage economic stability and growth for what they perceive as wider geopolitical advantages, even at the risk of military conflict.

In early December, the US House of Representatives China committee recommended Congress legislate to allow it to sanction the Chinese Communist Party economically and diplomatically if China engages in military action against Taiwan or other US allies and partners (partners could mean any country). The committee also advised the administration to revoke licenses that currently allow US companies to supply Huawei.

Politics and geopolitics override economics

Whatever conciliatory statements Biden made in San Francisco, he will likely be forced to repudiate next year as he fights to win the support of Americans who have been conditioned to see China as an enemy and want to see him ‘stand up’ to Beijing. The Democrats and Republicans are unified in their characterization of China as the architect of America’s domestic ills. When both American political parties unite over foreign commercial and political conflicts, Washington has sometimes made its worst mistakes, such as the escalation of the Vietnam War and recent military interventions in the Middle East, resulting in the deaths of hundreds of thousands and the diminution of American power and legitimacy.

While the Chinese economy will strengthen in 2024 and Beijing has enjoyed some rapprochement with both Washington and Canberra, global geopolitical threats have not diminished. The dangerous jousts between the US and Chinese navies along the fringes of China’s territorial waters continue. Although Taiwan and Vietnam are not the potential flashpoints they appeared to be a year ago, Biden’s military guarantee of the Philippines has created a new theater for a proxy conflict with China. France just announced it will conduct joint exercises with the Filipino military and that it intends to garrison soldiers in the country. The US and China continue inching towards a Second Cold War, evidenced by the AUKUS pact, the QUAD, Papua New Guinea’s security agreements with both Canberra and Washington, and the recent US announcement that it will deploy intercontinental ballistic missiles in the region soon — probably on Guam.

China remains committed to globalization; it has no choice, for it depends on imports for so many essential materials and components. As the Chinese economy recovers, so will the global economy, hopefully prompting many of its trading partners to restrain Washington’s paranoid struggle to contain China’s inexorable rise.

Foreign investors will need to consider geopolitical risks more carefully now and, in the years to come, as the US is likely to impose more restrictions on Chinese technology and continue to highlight selective (Chinese, as opposed to its allies’) human rights issues, all in the attempt to slow China’s growth. Chinese defensive rhetoric will only intensify in response, and it will continue to increase its military spending.

We hear a lot about China’s political tensions, but at least Xi is talking to foreign leaders again. I fly to the US next week to buy oranges. If we just do business as normal, hopefully things will become more normal again.

— Beverage company supply-chain manager, southwest China

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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Six months ago, Beijing appeared flummoxed by the complexity of guiding the economy back to growth and stability. There was no mention of big reforms and only scant references to the private sector, with considerable focus instead on the state. This seems to have changed, and policies announced over the last eight weeks have the potential to facilitate stronger private sector expansion and confer greater autonomy on the provinces.

Beijing cannot lead Chinese entrepreneurs out of their present uncertainty and skepticism by policies alone; they must also relax some of the rules that constrain them.

Finance to fuel economic recovery

Having partially curtailed loan sharks and shadow banking schemes, Beijing now needs to fill the funding vacuums this has created for the private sector to expand significantly. Over the last two decades, the government has been slow in allowing the development of private retail and investment banks, and now when it needs private sector growth urgently, there are inadequate means to fund that growth. At USD 3 trillion, China’s shadow banking sector remains a systemic risk to the economy, but it is also a resource to be converted into a regulated, stable source of private lending and investment, for many of the institutions within it are already adequately managed and hedged. China’s lack of financial diversity and flexibility has inhibited its recovery from three years of COVID and the collapse of the property bubble, which have inflicted major costs on public confidence and finances.

Despite improved macroeconomic indicators in the industrial and service sectors, consumers are still feeling uncertain and overly cautious in their spending on everyday items, waiting for proof that asset prices are rising again.

We have good salaries and savings and most of us are in steady jobs. But I admit: although unemployment is not widespread, I have friends who have lost their jobs and know that many working for the state have had to accept pay cuts. This is making me feel a bit insecure. Everyone is buying cheaper products, even when it comes to essentials. Frugality seems natural in hard times. The middle class is supposed to be hundreds of millions of people, but many were not born into it, so remember some form of poverty. They are conservative. This is a factor behind China’s slow recovery.

— Manager of a private trading company in Shanghai

Global economists are hoping for the worst

Most leading global economists have written off the Chinese economy and forecast a long decline, on the assumption that China rose on the basis of an unsustainable growth model driven by non-market factors over recent decades and is paying for it now. Western commentators tend to view Chinese economic data through distorting political lenses. Chinese economic gains are often reported as ill-gotten and tools of coercion, while economic contraction is presented as evidence of inherent instability and political illegitimacy. Much commentary is more akin to war rhetoric than rational economic analysis. It is true that China’s present economic recovery will likely continue to be uneven and any growth incremental. The risk of setbacks due to administrative blunders and external factors is ever-present, there are deflationary trends in many sectors, but the current recovery has momentum, and the policy direction is encouraging.

In October, Chinese industrial value-added (net manufacturing gains) rose 22% and retail sales were 14% higher than in October 2019. Supply and demand are both expanding, and apart from the residential property sector, prices are stable. New residential property purchases are still down in China’s 20 top cities, while existing homes are being purchased at significant discounts. Buyers across China fear they will lose their deposits on new apartments if developers fail. If the government were to establish a real estate deposit insurance scheme, similar to that which exists in banking, buyers would have more confidence in the better, medium-sized developers.

The economy’s winter awakening

Beijing appears to be initiating good policies to spur small and medium enterprises (SME) growth in particular, and there are signs that provinces are being given more fiscal autonomy, allowing them to restore their finances beleaguered by the costs of fighting the pandemic and the collapse of property prices. The appearance of monolithic power projected by the CCP means outside observers often miss the fragmented nature of China and the degree to which the government generally rules more by consultation and compromise with local officials — particularly in the wealthier regions — than by fiat. There were more political checks and balances before President Xi Jinping’s era, but the scale and diversity of the Chinese economy today create an economic equilibrium of sorts. The messages from the leaders in China’s top 20 cities to policymakers appear to constitute a unanimous demand for the central government to pay attention to the private sector and not expect to drive reform and repair through state-owned enterprises (SOEs) as much as in the past.

Few governments today seem to be managing their country’s markets well — understandable given the world is recovering from one of the greatest shared economic calamities since the Great Depression.

Public confidence after crises tends to return gradually, often imperceptibly, as individuals overcome their fears and make ordinary economic decisions again, each influencing the other, until hope becomes a subtle, steadily rising tide. This shift is now palpable in China, not so much among the wealthy in the major cities where people have more to lose, but among poorer folk in lesser coastal towns and significantly in the interior cities and rural areas.

New engines of growth

Beijing has announced it will increase support for the private technology sector. Although Chinese state bankers will continue to favor lending to SOEs over riskier private enterprises in an effort to avoid making mistakes that might cost them their jobs, the impact of more flexible credit practices is already apparent. In late November, Xi visited the Shanghai Futures Exchange and a number of technology companies in an attempt to demonstrate the government’s priorities. 

Adequately funded, the technology sector will become a significant driver of the economy, replacing some of the impetus previously supplied by the real estate sector. In the foreseeable future, the Chinese property sector will not return as a prime driver of the economy, and it must not become the forum for the reckless speculation of previous decades. In 2022, the tech sector grew 10% year-on-year, contributing 41% to China’s GDP. Year-on-year credit growth to SMEs could increase by as much as 20% by the spring of 2024.

Despite Washington’s embargoes on technology exports to China, Huawei developed a cutting-edge smartphone with chips supplied by a relatively obscure Shanghai company, Semiconductor Manufacturing International Corp — ironically blacklisted by the US in 2020. Huawei and other tech companies have demonstrated that trade restrictions designed to cripple have instead spurred a greater impetus to innovate and become more independent of global supply chains, faster than they would have aspired otherwise. From space stations to trans-oceanic fiber optic cables and fourth-generation fighter aircraft, China is matching and often exceeding its Western peers.

US tech companies are losing billions of dollars each year due to lost sales to China. US President Joe Biden’s conciliatory tone when meeting his counterpart Xi in San Francisco in November could well have been due in part to US tech companies lobbying Washington to ease sanctions.

Crisis is the mother of reform

The World Bank and the IMF are forecasting that China will achieve GDP growth in excess of 5% this year, recording the second-highest GDP in the world in 2023. Even with 4.5% GDP growth in 2024, it would be second only to India. China’s accumulated GDP growth over the last three years is approximately 20%, while US GDP grew by 7.7% and Europe by 3%. The fact that Chinese GDP growth will reach or exceed 5% this year without significant government stimulus should encourage foreign investors. They should, however, assess each sector carefully, as recovery will be patchy and there is little evidence that nationwide public trust in government will be restored soon. Confidence is especially low in cities like Shanghai which suffered stringent, extended lockdowns during the COVID-19 pandemic, and this in turn depresses household consumption. Consumption of nutritional supplements and quality food products in coastal cities is still strong, especially of imported premium-quality fruit, as the upper middle class remains willing to pay for established brands of reliable provenance. 

Although some in the local government have speculated that Beijing will resort to subsidizing households if consumption does not recover by the spring, it is more likely to pay subsidies to companies expanding in key sectors enabling them to employ more people. Despite China’s communist past and the current administration’s commitment to poverty alleviation, there are no traditions of welfare as there are in the West. The government will invest less in poverty alleviation programs and infrastructure projects in the poorer central provinces over the next 12 to 24 months as it concentrates on the areas of the economy that can offer better short-term yields. Critical poverty alleviation programs will nevertheless continue, particularly where they support the improvement of agriculture.

I know this may sound selfish, but the government spent too much on developing western China in recent years. If they had focused more on the middle class in the coastal cities they would have achieved greater economic and social returns, and the economy would be stronger.

There is some truth in critics’ assessments of China’s social investments, but over the past 50 years, most trickle-down economic strategies have failed. Beijing will focus its future fiscal reforms on coastal cities to restore middle-class citizens’ confidence in the system, but unless these are complemented by relaxing hukou (residency) reforms to allow greater internal migration — so rural workers can enjoy some of the benefits of urban life — they will only bring temporary prosperity and ultimately exacerbate the already large gap between rich and poor.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

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