Yves here. Simon Watkins is a diehard Anglosphere booster and so his posts need to be taken with a considerable grain of salt. Nevertheless, despite his strong bias point of view, his pieces often contain interesting facts. With respect to China, the headline statement should not be seen as controversial, if you step back a bit.
China is in the unfortunate position of trying to execute the “trees grow to the sky” fallacy. An economy as large as China’s can’t keep growing markedly faster than world GDP growth on a sustained basis. World GDP growth forecasts are in the 3.0% to 3.5% range. China cannot exceed world GDP growth by all that much on an ongoing basis without eating world GDP, an unacceptable outcome to many other players. Yet high growth rates are key to the legitimacy of the current government. The reality is the population will likely accept markedly less if the benefits of growth are reasonably well distributed across society. I don’t know China well enough to judge if that is a realistic way out of its high growth fixation.
On top of that, there are reasons to think that in the longer term, global growth seems unlikely to exceed 3.0% to 3.5% level, between increased resource scarcity, global-warming-induced harvest shortfalls and mass migrations, high levels of international and internal conflicts, and efforts by the US and EU to punish Russia and China, which is interfering with supply chains. A specific factor is that the loss of Syria appears to throw a spanner in China’s Belt and Road project (see Colonel Wilkerson for confirmation).
And in terms of China, the loss of housing wealth lowers the actual level of savings in China. Given the lack of social safety nets, the impulse of those so afflicted to save more to compensate will impede China shifting to more of a consumer-demand driven economy.
By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. Originally published at OilPrice.com
- China is adopting looser monetary and proactive fiscal policies to boost growth to 7%+.
- High youth unemployment, property sector defaults, and bad loans totaling trillions pose significant risks to achieving this target.
- Increased U.S. tariffs under a potential Trump presidency could further strain China’s economic recovery efforts and international trade.
Amid ongoing domestic and international concern over the scale and sustainability of China’s economic rebound from its Covid years, Beijing announced on 9 December that it will adopt an “appropriately loose” monetary policy next year, the first such easing in 14 years, and a more proactive fiscal policy to boost economic growth.
Although the measures already put into place earlier this year should enable China to achieve its growth target of “around 5%” for 2024, these new measures are aimed at recapturing the 7%+ annual economic expansion commonly seen in the country before the widespread onset of the pandemic at the end of 2019. “That is the figure the CCP [Chinese Communist Party] needs to ensure the security of its rule at home and the continuation of its policy to project power abroad, so not achieving this rate of growth soon is an existential threat to both,” a senior energy security connected to the U.S. Treasury exclusively told OilPrice.com last week.
Domestically, the longstanding covenant underlying Communist Party rule in China has been that the population will accept curbs on personal privacy and freedoms in exchange for an improved standard of living. This was relatively easy to achieve in the early phase of this model with the steady migration of hundreds of millions of people from a relatively poor agrarian existence to a relatively more prosperous urban one over time. The increase in economic growth for the country that accompanied this was stunning, albeit from a relatively low base, with gross domestic product (GDP) expanding over 10% a year for several years. As urban momentum gathered pace, so did the boom in construction and manufacturing for the products required by this burgeoning population, with this in turn fuelling a dramatic expansion in China’s manufactured exports. Even after this growth model shift into one defined by the rapid enlargement of the middle class, growth in consumption-led demand for goods and services remained very high.
However, as this began to drop as Covid appeared, unemployment rapidly rose across the country, especially among the key youth demographic. China’s government is acutely aware of the potential for high youth unemployment to spiral into widespread protests. It also knows that just before the series of violent uprisings in 2010 that marked the onset of the Arab Spring, average youth unemployment across those countries was 23.4%. After its own figure reached a record 21.3% in June 2023, it stopped publishing the youth unemployment data and only resumed when it had changed the data inputs.
Consequently, as the pandemic increased curbs on personal privacy and freedoms while the standard of living for much of the population declined the longstanding covenant between the people and the government was seen to have broken. And for the first time since the mid-1980s that culminated in the 1989 massacre in Tiananmen Square, China’s CCP faced a wave of public protests across the country. Unprecedentedly for President Xi Jinping personally, this included protesters shouting “Step down, Xi Jinping! Step down, Communist Party!”. Internationally, the U.S. was also watching these developments and is very aware of the fundamental covenant that allows the CCP to continue to rule in China. It is also aware that China’s projection of its power abroad is dependent on its ability to leverage huge ongoing financial investments in strategically-important countries into political influence.
Worse still for Beijing is that Donald Trump’s second term as president is highly likely to take an even more stringent approach to China than even his first. Back in 2017 at his first national security meeting, then-President Trump described China as a “strategic competitor” which along with Russia was trying to “shape a world antithetical to U.S. values and interests”. In 2020, he gave a long speech detailing the multiple ways in which he saw China as having “for decades, ripped off the United States like no one has ever done before”. And even before he has taken office this time around, his campaign trail was punctuated with comments that he will dramatically increase trade tariffs on China. As Eugenia Victorino, head of Asia strategy for SEB in Singapore exclusively told OilPrice.com, President Trump’s second term effectively heralds a resumption of the U.S.-China Trade War. “The Phase 1 deal will be renegotiated with the [Robert] Lighthizer plan likely implemented, and this will raise average tariffs to around 22% from 13%,” she said. However, that may well just be the opening salvo of the new Trade War between the two countries, as during the 2018-2019 period of the previous one the U.S.’s tariffs against China were raised in stages. By September 2019, up to US$250 billion of Chinese-made imports faced 25% tariffs while US$120 billion of imports were facing 15%, Victorino underlined.
That said, she highlights that Beijing may be better prepared for the resumption of such hostilities than it was last time. “In 2018, exporters assumed that the threat of a 25% tariff on a broad basket of goods was merely a negotiating tactic, but this time they have been working with the assumption of an increase of average tariffs by around 30-45%,” she told OilPrice.com. “Moreover, Chinese exporters have been managing their margins for the past 6 years,” she concluded.
However, despite this, the likely monetary and fiscal policy measures that China will take to boost economic growth back to the key 7%+ annual rate required to ensure the security of the CCP’s rule at home and the continuation of its policy to project power abroad may not be enough, Mehrdad Emadi, head of risk analysis and energy derivatives markets consultancy, Betamatrix, in London, exclusively told OilPrice.com last week. “On the monetary policy side, China is already allowing for softer loans in the construction and housing sector in an attempt to prevent a second wave of bankruptcy and default by property developers, with the most up to date estimate of underperforming mortgages and inter-firm loans suggesting a nonperforming bad loan value of US$4.3-5.2 trillion,” he said. “New softer loans issued by the monetary authorities and the extension of credit to construction firms by state-owned banks are indications of how serious a threat these can be if the continuing downturn and loan defaults are left to market forces,” he underlined.
According to Emadi, US$840 billion of such softer loans have been made available with another US$250 billion ready to be made available. Latest estimates put the share of the housing sector in China’s economy at around 20-25%. Beijing is also considering a US$12 billion credit line at almost zero cost to be made available to the country’s automotive industry to also prevent it from becoming too fragile, he added.
At the same time, he told OilPrice.com, the fiscal policy changes are likely to be aimed at preventing the local authorities from becoming more immersed in land-tied deals in which they sold land to construction firms but have received little payment in the post-2018 period. “The hope was when the new apartments were sold by the construction firms the local authorities would get paid for the land,” said Emadi. “But this has become the real ‘Dragon’ in the economy as the deficits accumulated by the local authorities based on land-tied deals is somewhere between US$12-15 trillion, which poses a real bankruptcy threat to the regions that became too involved in such activities,” he underlined. “Even with Beijing’s impressive foreign exchange reserves [US$3.37 trillion equivalent], the magnitude of the bad money arising from these factors causes real concern about the ability of Chinese government to implement the reforms needed to make a measurable and meaningful lift to growth rate of 7% plus,” he added. At least as concerning for the CCP and President Xi is likely to be that these macroeconomic factors have become very personal for the population. “Due to the property defaults, bad loans, house price falls and rising unemployment level, China’s official reported figure of US$19.2 trillion for household saving is misleading – in reality, it appears to be around 31% lower,” he concluded.
I don’t understand this obsession with constant growth. The planet’s resources are not infinite. Why not provide people with a guaranteed salary instead? China’s focus on growth stems from the need to create jobs for its population, but in reality, the state doesn’t need to operate this way. They could simply provide unemployed people with a minimum wage, funded by printing money.
China has spent hundreds of billions to save the stock market, but allocating the same amount to welfare is seen as sacrilegious. As long as China continues to embrace capitalism in this way, USA will for ever have hedge over them and that hedge is dollar. The only way to beat USA is to create welfare state with state funding it by printing money
Dumb Q but why is growth an important metric for a non-capitalist economy?