CHINESE CHECKERS
Another term for Xi Jinping as President is coinciding with the Chinese economy witnessing an erosion in its economic heft. EPISODE #95
Dear Reader,
A very Happy Monday to you.
Sunday witnessed the start of the Congress of the Chinese Communist Party. Among other things it will give an unprecedented third term to President Xi Jinping at the helm. A grand moment for the feisty leader.
Yet if there is one wrinkle that mars this historic moment for the Chinese president it is the state of his country’s economy. It is in trouble.
After years of a punishing pace of economic growth which powered it to the second largest economy in the world, the juggernaut’s stride has been arrested by the covid-19 pandemic. Pursuit of a zero-covid policy in the face of an ineffective vaccine has only aggravated an already difficult economic circumstance.
There are so many questions that spring to mind. And most of them remain unanswered as legacy media continues to report within the guardrails of their bias.
Coincidentally, I interviewed Richard Martin, the managing director of IMA Asia, for my latest episode on StratNews Global. A veteran observer of the region and China in particular, Richard shared some wonderful insights about a country that has always remained an enigma. So, for this week I opted to explore the Chinese economy through the pertinent observations of Richard. Do read and share your feedback.
This week’s cover picture is by Eric Lin and sourced from Unsplash. Thank you Eric for the poignant photo of a frontline covid-warrior in Beijing.
A big shoutout to Balesh, Gautam, Premasundaran, Aashish and Vandana for your informed responses, kind appreciation and amplification of last week’s column. Gratitude also to all those who responded on Twitter and Linkedin. Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.
THE DRAGON’S STUMBLE
In 2007, the Chinese economy recorded a stupendous growth of 14.2%. Fifteen years later, the International Monetary Fund (IMF) projects that economic growth will slow to 3.2% this year. In fact, the country may be lucky to log this, given the rapidly deteriorating global situation.
Indeed this is a stunning slowdown. And that too for an economy which the IMF estimates to be a staggering $20.26 trillion—the second largest in the world behind the United States.
More importantly this slowdown coincides with an imminent third term for President Xi Jinping. Surely, while he will be savouring the personal milestone, the President must be worried about the state of the economy. After suffering its worst shock ever, the economy has taken more than just a stumble.
China’s pursuit of a zero-covid policy has only made a bad situation worse. Foreign manufacturers with a base in China are already scrambling for safety; and the moniker for this is “one-plus”. The decision by Apple to manufacture the iPhone in India is one such example.
Yet the Chinese establishment refuses to blink. It remains steadfast in its commitment to a zero-covid policy, even while local governments already stretched, struggle to meet their development targets. It is baffling to say the least.
Luckily for me the conversation with Richard Martin, managing director of IMA Asia, for my latest episode on StratNews Global was more than just helpful. Richard unpacked the knots to draw some dramatic conclusions about the present and the troubled future of the world’s second largest economy.
The Pivot
Logically one would expect that reviving growth would be the big priority for the Chinese authorities. Surprisingly, it is not. In a must see conversation with me for the weekly episode of Capital Calculus telecast on StratNews Global last Thursday, Richard said:
“I think the thing that has become clearer to us about China this year is that it is not so interested in growth. It is not interested in the GDP number, you know; all of us thought it was going to aim for 5%.
That is not its goal; not its goal this year, probably not its goal ever in the future, at least under the leadership we have got.”
And this Richard argued is part of a well thought out plan:
“It is not really the China, we thought we were going to be seeing, you know, they've turned away from that concept when they joined the WTO, back in 2001, of becoming a market-led economy.
It is going back to being a party-led and a state owned enterprise-led economy. And that's a pretty big shift.”
What then are the new priorities?
“(First) China wants to be a successful Communist Party-led state. And that is a really a dominant goal this year that they are paying attention to; you could say, they have sacrificed growth to achieve that goal.
A second thing is they want China to be a powerful national player, at least equal to the United States. So there's a big push on nationalism and try to force China's line on global politics, interpret things the way China sees it.
And then the third thing, it really wants to be a technology leader, and of course, that's leading into a pretty tough battle. At first, it was just with the United States, but it looks it is going to be broader.
So that is I think one of the big things we've learned about China this year; they are just not focused on growth and that they've got other goals. It is about what China wants to be.”
The Fall Out
This big pivot is coming at a severe economic cost. Worse, as the shadows of recession lengthen over the United States and Europe, it means that exports, the one engine which previously powered the Chinese economy, will start to lose more steam. Worse foreign companies are already beginning to walk the talk on the ‘one-plus’ strategy.
Listen to what Shezad Qazi, managing director of China Beige Book, a company that generates large-scale, private data on the Chinese economy.
The downside risks to the Chinese economy, especially those emanating from the property market which accounts for a third of the country’s national income, are indeed worrying.
Richard echoed Shehzad’s views.
“The other ripple effect you get is the consumer sentiment in China. The National Bureau of Statistics does a survey on this, you know, their own statistics office; it crashed three or four months ago. I mean, since the index came out in 1990, it has never been as low; it has just gone through the floor.
And that is because the average Chinese household has 60% of its wealth tied up in property. That's extraordinary over exposure to the property sector. So if the property sector goes, you can write off the Chinese economy. So the ripple effect is big, more like a tsunami effect.”
As the second largest economy in the world and one that is so deeply entwined with the fortunes of so many countries, the implications of a slowing or worse an imploding Chinese economy will be devastating.
Interestingly Richard argues that it could actually work both ways for the Asia-Pacific region:
“There are two big things to watch, which really do affect the rest of the region. One is tourism. Outbound Chinese tourists were gigantic over the last decade, and went from zero per cent of tourism inflow across Southeast Asia to 25-30%. And it really drove Thailand, Philippines, Malaysia and Singapore as well. (It was) Even important for Taiwan, Japan, and Korea. This is not going to restart next year. So that is a loss for everyone.”
“The second thing is a bit more positive for the rest of the region. We are seeing export operations, relocating, not all of them, but some of them.
You can actually see it in the statistics; go look at US imports statistics, China's share hit a peak 22% of US imports four or five years ago. Now I think it is down to about 18% and steadily falling. The big winners so far have been Mexico and Vietnam.
I think more will go into Southeast Asia; Malaysia will get some, Thailand will get some. It will be interesting to see if India is a big mover in this regard.”
It is clear that for President Xi, winning the political battle to claim an unprecedented third term at the helm was the easy part.
The more difficult challenge will be negotiating the economic crisis. Either way the outcome has grave implications for the world in general and Asia in particular. After all, erosion of economic heft will also mean that much less global clout.
Recommended Viewing
This week’s newsletter was inspired entirely by the latest post of Capital Calculus on StratNews Global featuring my very engaging conversation with Richard Martin.
Presumably, the teasers I shared above will goad you to watch the entire nearly half-hour long interview. Trust me you will not regret it.
Till we meet again next week. Stay safe.
I wonder if snapshots of different sectors and different events can actually give us a sense of the whole for a country as large as China.
I also feel that sometimes we tend to talk of things we wish would happen as if they are either happening or will happen.
The interface of Politics and Economics in China is real and highly interdependent.
We are still learning to understand them.
Dear Anil,
Very interesting article on our not so friendly neighbour!! enjoyed reading it and also the video.