It has always been the question of not if but when the Chinese economy would slow sharply “for the simple reason,” as one leading economist and China watcher once put it, “that it has done so well.”
The recent numbers are quite worrying, and as the saying goes in the field of crisis economics, it is when the tide had washes out that you would know who was swimming naked. China’s massive debt levels, a subject of intense media attention, are often seen as the factor that could finally send the world’s second-largest economy into a tailspin. But China is a big economy and it takes time for such a big ship to feel if the winds were blowing against it.
China-watchers are surveying the political situation with caution. “It won’t be a precipitous collapse but a slow, painful decline,” said a Hong Kong-based critic of China. “The [Chinese Communist Party] is in trouble but the party also has a formidable police state apparatus. [Chinese leader] Xi Jinping is also in big trouble, but he still heads the army and police. Xi is extra careful about things like coups. So it may not yet be apocalypse now.”
The new numbers are ominous, even though it is easy to get lost in statistics. Export growth slowed sharply from 5.4 percent growth in November to negative 4.4 percent in December, a development that one global bank called it the “much-awaited bad news.” Exports to the US, Europe and Japan all slid, reflecting weaker global demand and slowing developed markets.
Worries of an impending trade war with the US led to China’s exports to the US to suffer even more notably, as seen from exports from HK, from where from much of the Chinese exports are routed to the US. The numbers are also skewed somewhat, coming off a high base as Chinese and multinational manufacturers in China hyped exports in advance of an expected 25 percent tariff increase implemented by the United States. US-bound exports in November reached US$344.7 billion, a year-on-year rise of US$25.4 billion.
Not surprisingly, Chinese imports are also falling down quite sharply, especially in IT, semiconductors and auto parts. Overall, China’s merchandise export growth is expected to slow from 10 percent in 2018 to 4 percent in 2019 and imports from 16 percent to 5.4 percent.
That might arguably be decent growth for a developed country but may not be a lot for a state that has long rationalized its unquestioned rule over its people with its ability to deliver sharp economic and social mobility, if not rapid prosperity.
Having grown at a brisk pace over the past two decades, it was inevitable that the Chinese economy was set for such a sharp correction, if or no other reason than that it is impossible for an economy to keep growing at such rates.
The downward slide in the Chinese stock markets had long been factoring in leaner times ahead. It is not just the stock markets but the mandarins in Beijing who have also long seen it all coming, and hence the plethora of measures to readjust its policies, to boost domestic consumption in particular, so that the economy is less susceptible to external shocks.
To export its excess capacity, Beijing launched the much-criticized mega infrastructure project, the Belt and Road Initiative, which, according to most reports, has earned growing criticism for being expensive, inefficient and, worst of all, for being simply a pretext to promote China’s geopolitical ambitions.
The slowdown in Chinese exports also raises questions about what impact they would have on the regional economies that are heavily dependent on exports to China, such as Korea, Taiwan, Malaysia, and Singapore. For better or worse, Asian economies have had a good run riding on the sails of the Chinese, with the Middle Kingdom accounting for a bulk of their total outbound shipment.
The Beijing government is obviously leaving no stone turned in trying to stimulate the economy. The People’s Bank of China, the central bank, welcomed 2019 by slashing its reserve requirement ratio by 200 bps primarily to boost bank lending amidst sluggish corporate credit demand.
The troubles in China’s property sector have long been the lore of gloomy economists but they are also coming under added pressure. A Chinese securities firm, China International Capital Corporation (CICC), called 2019 a “year of recession” for China’s property market, predicting the sales of real estate will fall for the first time in five years.
The Chinese currency, the renmnbi, is grossly overvalued, propped up by the government through artificial means such as capital controls. It is not without reason why the Chinese citizens had been instrumental in fueling a global boom in Bitcoin and cryptocurrencies to help them move money out of the country.
No doubt, such a mix of ominous factors should be a source of alarm for the powers that be in Beijing, who are now battling, at once, their two worst enemies, a combination of cyclical and structural slowdown.
China suffered its last cyclical slowdown in 2015 but this one, which began only two years later in 2017 is “much deeper,” according to one Hong Kong-based economist.
Much of the slowdown can also be the success of China’s clampdown on shadow banking that has restricted credit to the real estate and local government sectors and a substantial slowdown in infrastructure investment, which is partly a result of the Xi Jinping's relentless anti-corruption campaign.
Pessimists sounding alarms about the Chinese economy with their “this time it is different” speeches have long been dismissed by optimists convinced by what they regarded as the near-divine powers of the Chinese leadership and invincible might of China’s economic engine.
They were to be forgiven for it is indeed the alignment of the stars that have helped consistently prove wrong the Doctor Dooms of the past, most notably Chinese-American author Gordon Chang and his infamous 2001 book titled The Coming Collapse of China. Chang also predicted China’s demise in 2006, 2011, 2012, 2016, and 2017.
The resilience of the Chinese economy could be attributed less to the genius of its planned economy or its stable governance or the foresight of the Communist Party than to its position as a source of inexpensive labor and a manufacturing base for the world’s consumers, especially those in the developed world.
On the longer-term, what may be even more worrying is what would be the impact of a slower-growing, insecure China on regional geopolitics. Its economy may not yet be sliding toward the edge of a cliff but the good times are ending. And it is bad news not just for China but more so for the neighboring Asian region, given the way it has replaced the west as a regional powerhouse to sustain economies delivering both manufactured inputs and raw materials. Chinese imports of Korean goods shrank in December by 18 percent annually. Other than Hong Kong, import demand from China declined in every country in Asia.
According to a Brookings Institution study, every one of the major East Asian economies—Japan, South Korea, Taiwan, Thailand, Singapore, Malaysia, Indonesia, Philippines, and India—is running a substantial trade surplus with China, whose manufacturing sector has become heavily dependent on imports from the economies of East Asia in order to feed its factories and its export-producing machine pointed at the west. China passed the United States as Japan’s leading trading partner as long ago as 2005.
Taiwan, for instance, is deeply dependent on China despite continuing political fireworks, with some of the biggest Taiwanese companies such as Foxconn, which assembles Apple electronic devices, employing hundreds of thousands of people on the mainland. Some 71 percent of the companies listed on the Taiwan stock exchange have extensive interests in China. Total investment by Taiwan is estimated at US$78 billion
For Taiwan, Korea, and Japan, China has become an essential part of their production line. First their low-end, labor-intensive industries moved their assembly plants to China to reduce costs and allow their products to remain internationally competitive. Gradually, higher and higher technology assembly has been moving to China.
Thus as Brookings says, “If the Chinese economy catches a cold, the others in the region sneeze.” If China catches pneumonia, it’s time to break out the oxygen masks and IV needles.