Those measures may have helped grow industrial production by 4.4 per cent year-on-year, an increase from the 3.5 per cent growth rate in May. Also, the growth in fixed asset investment (which is generally government-driven) in the June half of 3.8 per cent was only slightly lower than the 4 per cent growth recorded in the first five months of the year.
China’s growth model has been based on external trade, its domestic property industry and, increasingly, consumption.
The most recent data shows that exports, which peaked in December 2021, fell 12.4 per cent in June relative to June 2022. Some of that may be due to the sanctions on advanced technologies imposed by the US and, increasingly, its allies, but the more significant factor would be the slowdown occurring within the global economy.
With the advanced economies all continuing to raise interest rates in response to still-elevated inflation rates, demand for China’s manufactured goods is likely to slow further before it stabilises. Longer term, the restructuring of global supply chains in response to the pandemic experience, and the increased tensions between China and the West, will restrict growth in trade.
The property sector, where a decades-long boom was punctured by Xi Jinping’s “three red lines” restrictions on leverage, remains depressed despite concessional funding for developers and incentives for buyers. Housing prices have been falling steadily for more than a year. New housing construction was 28 per cent lower in June than a year earlier.
Given the key role that property plays in the savings of Chinese households, the continuing distress within the property market is a significant factor in the weak consumer demand. With few social safety nets and without the cash that Western governments showered on their consumers during the pandemic – largesse that fuelled a consumption boom – those households are sitting on their savings.
The absence of an obvious plan to reignite growth probably explains why Xi hasn’t yet responded meaningfully to the slowdown.
The pressure on Beijing to respond is mounting, but its options are limited.
The weak condition of the rest of the world means it is unlikely that an export-led manufacturing boom will come to China’s rescue.
The property sector is so distressed, with developers massively over-leveraged and consumers cautious, that lowering the cost of borrowing to try to stimulate activity is unlikely to be an effective strategy when there is such meagre demand from buyers.
The amount of debt within the economy, and particularly within the local governments and their financing vehicles that have traditionally been a conduit for stimulus but which are reliant on income from land sales for much of their revenue, also makes it unlikely that Beijing will resort to the kind of massive infrastructure-focused programs of the past, most notably in response to the 2008 financial crisis.
China has been trying to attract foreign investment, sending its trade officials out into the Western world to try to drum up some inflows even as its raids on foreign consultants and withdrawal of access to economic data is scaring off the investment it is seeking. The increasing friction between China and the West is another deterrent to inflows of foreign capital.
An obvious strategy would be to put cash in the pockets of its consumers to try to regenerate consumption, but there is no certainty that they would spend it.
The absence of an obvious plan to reignite growth probably explains why Xi hasn’t yet responded meaningfully to the slowdown, although there is a meeting of the Politburo later this month which might result in some action.
Xi would know that most of the obvious structural problems in China’s economy – problems that he has tried to address with his crackdowns on leverage in the property sector, on e-commerce platforms and on conspicuous wealth in the private sector – would be exacerbated if he resorted to conventional stimulus measures.
The timing of Xi’s shift in China’s economic strategy from Deng Xiaoping’s “socialism with Chinese characteristics”, which unleashed a remarkable private sector-led, three-decade economic boom, to a greater emphasis on state-driven and controlled “common prosperity”, has been unfortunate in the midst of a pandemic.
China’s economic authorities have been trying to convince private sector businesses that they aren’t trying to quash their activity, but the sight of some of the country’s largest and most successful private businesses being dismembered, fined massively and their leaders diminished seems to have had chilling effects.
China is now facing demographic headwinds. Its population is ageing and shrinking, and the rate of rural-to-urban population drift that has played a major role in its turbocharged growth into the world’s manufacturing platform has slowed.
With the other structural challenges it faces from the reorganisation of global supply chains, the web of technology-related sanctions the US and others have been weaving and the levels of property-related leverage within its economy, Xi may be forced to re-consider what “common prosperity” now means.
That would mean re-thinking the role that China’s private sector should play within the economy, and the freedoms private businesses should be granted if the economy is to achieve the growth rates needed to underwrite Xi’s economic and geopolitical ambitions and avoid social unrest.
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