Tag: China economy

Business Matters | Is China’s economy in the doldrums?

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A recent Bloomberg article had a headline that caught my eye: Wall Street Snubs China for India in a Historic Markets Shift.

Often, but not always, stock market movements are indicative of what is happening in an economy. In today’s episode, let’s see what has been happening in China on various economic fronts. 

Chinese stock market indices have fallen given concerns around the economy. Japanese newspaper Nikkei reported that on February 5, the Shanghai Composite Index touched its lowest close in four years. In the week ended February 2, the index fell 6.2% in its biggest weekly loss since October 2018. 

China’s biggest real estate developer, Evergrande, which was in the news recently for having too little funds to pay too much debt, went into insolvency a fortnight ago. In a sector that accounts for about 20% of the world’s second-largest economy, such a large entity going into insolvency sounds alarming. 

But it does look like the bad news has been on the horizon and has finally hit the industry. The IMF notes in a recent blog that the reliance on real estate for economic growth has been accompanied by the buildup of significant risks. 

The Fund says that home prices became significantly stretched relative to household incomes in the decade before the pandemic, in part because consumers preferred to invest their considerable savings in real estate given the scarcity of attractive alternative savings options. 

CNN estimates that more than 2/3rds of household savings are tied to the real estate sector. Why so? Expectations of continued increases in home and land prices allowed property developers to borrow rapidly, with land sales providing crucial revenue for local governments, according to the IMF. 

However, recognising the bubble and needing to step in the Chinese government moved in 2020 to make it harder for developers to borrow. Since then, many of them have fallen into insolvency, unable to pay debts. News of insolvency of the sector’s poster-child, Evergrande, has rattled industry. 

One consequence of the government clamp-down is that house sales have fallen amid homebuyer concerns that developers lack sufficient financing to complete projects and that prices will decline in the future. 

What will exacerbate housing sector woes is that the coming years demand will eventually dip. One reason is that the country will see fewer younger folk seeking new housing. 

And why is that? Not only because of poor buyer confidence but also because China’s population is ageing. Going forward, there would be fewer and fewer young people with a lot of years of productivity left in their working lives to seek new housing. 

WHO estimates that by 2019, there were 254 million older people aged 60 and over, and 176 million older people aged 65 and over. By 2040, an estimated 402 million people (28% of the total population) will be over the age of 60. 

Also, the country’s total population is dipping. In 2023, the count dipped for the second year in succession and this time by about 2 million. 

An ageing population is always a problem for a country’s government? Why? You have fewer people to add to economic productivity and increasingly more senior citizens to take care of with higher expenses in the form of healthcare expenditure, pensions, and the like. 

On another economic front, China’s debt burden too has increased. 

Nikkei Asia recently reported that China’s debt-to-GDP ratio climbed to a new record high in 2023 despite a slower pace of borrowing, reflecting the economy’s weakening growth. It touched about 287% of GDP.

Compare this with India, where the ratio was about 81% as of March 2023.

Now, let’s come to actual economic growth. The IMF estimates that China would have grown about 5% in 2023. On such a large base, 5% growth is not something to belittle or scoff at. 

What is important, and making global investors jittery, is the potentially slowing rates of growth. 

The Fund estimates that 2024 would see China grow 4.6% and that there would be a gradual decline. It estimates 2028 growth at 3.5% for China. 

Ironically, just at a time when a country would want its businesses to thrive, both domestic and foreign companies have come under the lens of Chinese authorities. Regulatory actions have coincided with the timing of other economic woes that we have just been over. 

Billionaire Jack Ma, founder of Alibaba – or China’s Amazon equivalent – had gone off the public eye for a while and when he did resurface, has been far more subdued. Media reports point out that in his earlier avatar as a successful business magnate, he had made comments about China’s financial system that likely didn’t go down well with the authorities. By 2020, the government had intensified scrutiny of his businesses.

The latest news is that he has busied himself with educational projects and has invested in a firm that sells farm products. 

China has also filed a lawsuit against one its largest businesses Tencent for violating laws that protect minors. The authorities have also come down heavily on the video gaming sector in which Tencent is an entrenched player.

In its geopolitical fight with the US, China has also shown hints of aggression against US companies operating on its soil. For example, Chinese government offices do not allow a Tesla car to be driven into their premises on security fears. The cars tend to collect data on their surroundings and this has triggered the action.

In the middle of last year, the US flagged concerns around American firms in China struggling with aids by authorities, slow deal approvals, the use of anti-espionage law to make life difficult for these companies.

As a consequence of its geopolitical tiff with the US, the North American nation has been urging its companies to find alternative supply chains. Recently, Mexico replaced China as the country from which the US imports the most. Ideally, India would have like to have taken that place. But our country not only does not have the geographical proximity to the US that Mexico but it also has to contend with Vietnam and the Philippines as competitors. 

Finally, we come to deflation – a word that is anathema to any country that wants healthy economic growth. China saw the greatest drop in consumer prices in over 14 years in January. Its consumer prices decreased by 0.8% year over year, which was the longest decline since October 2009. This was the fourth consecutive month of declines. Consolingly, the consumer price index rose 0.3% on a monthly basis, marking the second consecutive month of growth. 

So net-net, to answer the question in the title to this video, is the Chinese economy in the doldrums? Likely not. This is the second-largest economy in the world. Its population is still significant. Its people will still have to buy food, buy electronic gadgets, its children will still have to go to school… so consumer demand will eventually revv up, experts say. But do challenges exist in the near term? They sure do.

Script and presentation: K. Bharat Kumar

Production: Shibu Narayan

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Explained | Why is the U.S. shifting its approach to China from decoupling to de-risking?

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The U.S: President Joe Biden with European Commission Ursula von der Leyen during the G-7 Summit in Japan.
| Photo Credit: ANI

The story so far: The Trump-era focus of the U.S. to decouple from China is being phased out by a new concept. The U.S. has expressed that it is shifting its policy on China from decoupling to de-risking. The EU has already declared that its approach to China will be based on de-risking. The recently concluded G-7 summit at Hiroshima, through its Leader’s Communique, has also expressed the grouping’s consensus on de-risking.

What is ‘de-risking’?

After the establishment of diplomatic ties between the U.S. and China in 1979, both the countries embarked on a path of increasing economic interdependence. China gained immensely from this relationship, as it helped the country drastically widen and deepen its diplomatic and economic engagement with the rest of the world. As China’s economic and military power grew, its ambition to challenge the primacy of the U.S. in the international system became increasingly apparent. China’s rise not only came at the expense of America’s global clout, but also the latter’s domestic industry, which got “hollowed out” in its four-decade old economic embrace with China.

By the time Donald Trump took over the reins of power in the U.S., dealing with the techno-economic challenge from China became a matter of urgency. The Trump administration made it a point to attack the gargantuan bilateral trade imbalance in favour of China. It also wished to keep the U.S’s high technology sector out of China’s reach. In a series of moves, Trump raised tariffs on Chinese imports which invited retaliatory tariffs from China. The U.S.-China ‘trade war’ started, and bilateral relations were set on course for a “decoupling” from the American standpoint. This approach was marked by a rare sense of bipartisanship in an otherwise polarised domestic political climate in the U.S.

Therefore, the Biden administration which took over from the Trump administration continued with the latter’s China policy. However, over time, the Biden administration added its own features into the China policy inherited from Trump. Most recently the label of “decoupling” has been changed to “de-risking”. According to the U.S. National Security Advisor Jack Sullivan, “de-risking fundamentally means having resilient, effective supply chains and ensuring we cannot be subjected to the coercion of any other country”. While decoupling stands for an eventual reversal of the four-decade old project to enmesh the two economies, de-risking aims to limit such an effect only in areas where it undercuts the national security and industrial competence of the U.S.

This shift has been articulated by the Biden administration in two recent landmark speeches — by the Treasury Secretary Janet Yellen on the “U.S.-China Economic Relationship” at the Johns Hopkins School of Advanced International Studies on April 20, followed by that of Jake Sullivan on “Renewing American Economic Leadership” at the Brookings Institution on April 27. Recent legislations in the U.S. such as the Bipartisan Infrastructure Law, CHIPS and Science Act as well as the Inflation Reduction Act have been subsumed under this new approach. The U.S.’s geo-economic initiatives like the Partnership for Global Infrastructure and Investment as well as the Indo-Pacific Economic Framework for Prosperity are also supposed to reflect the spirit of de-risking.

Why de-risking?

In order to understand the rationale behind the U.S.’s shift from decoupling to de-risking, it is important to comprehend the timing of the move. The policy change has been announced in the wake of several events of high geopolitical significance. The world has just emerged out of the tentacles of the pandemic after three disruptive years and the global economy is hoping for a resulting rebound. The U.S.-China rivalry had peaked in the past few months — from the ratcheting of tensions across the Taiwan Strait to the acrimonious spy balloon episode between the two countries. China also witnessed Xi Jinping beginning his second decade of rule over China in an unprecedented third term as the General Secretary of the Communist Party of China, Chairman of the Central Military Commission and President of the People’s Republic of China, ever since the dawn of the reform era. In parallel, a year has passed since Russia began its special military operation in Ukraine, with the conflict going on without any end in sight. Mr. Xi, after starting his third consecutive leadership term, made his first foreign visit to Russia where he proposed a peace plan. He has also, in his third leadership tenure, extended his “peacemaking diplomacy” to West Asia, striking gold in normalising the frayed Saudi-Iran ties. All of these developments have necessitated the U.S. to recalibrate its posture towards China. In such a situation, casting the U.S.-China relations as a new Cold War and a zero-sum game appears to be risky for the U.S. Bringing more nuance into its earlier decoupling approach could bring down China’s guard and give the U.S. more room to re-consolidate its strength.

Perhaps, the Russia-Ukraine conflict could have played a pivotal role in enabling the U.S’s policy shift towards China. The Biden administration, unlike its predecessor, has made it a point to reassure its European allies. At a time when China has been backing Russia in its shadow battle in Ukraine against the West, the idea of decoupling hardly appeals to the European Union (EU). The EU has in fact been looking to woo China in order to convince it to stop supporting Russia from skirting Western sanctions.

In this context, a watered down version in the form of de-risking could better achieve the objective of getting Europe on board the U.S’s efforts to counter China. It is therefore no surprise that the U.S’s recent articulation of its de-risking approach repeatedly draws references to the European Commission President Ursula von der Leyen’s milestone speech on “EU-China relations” to the Mercator Institute for China Studies and the European Policy Centre on March 30. In her speech, Ms. von der Leyen stressed that the EU’s strategy to China will be based on de-risking. This was a precursor to her visit to China in April, along with the French President Emmanuel Macron, with the Russia-Ukraine war as the main agenda. In fact, China policies of the U.S. and the EU have been witnessing a significant convergence of late — recent developments may have only triggered the Trans-Atlantic consensus on de-risking vis-à-vis China.

What could be the geopolitical ramifications of de-risking?

The U.S. efforts to keep its allies closer in its geopolitical rivalry against China by adopting the path of de-risking has already won a significant victory in Japan at the G-7 summit. The leaders at the summit declared that they will coordinate their “approach to economic resilience and economic security that is based on diversifying and deepening partnerships and de-risking, not de-coupling”. China has expressed its scepticism to the West’s de-risking approach, portraying it as a façade to the decoupling agenda. Moreover, China has expressed its disapproval in painting China as the actor responsible for heightening geopolitical risks. According to China, the real source of risks is the U.S., which it alleges to have created instability across the world by pursuing political and military interventions and perpetuating a Cold War mindset.

The continuing emphasis in de-risking to diversify supply chains away from China demonstrates that the Trump-era spirit of decoupling is being carried forward, albeit with some changes. This could also make the West’s moves to counter China’s rise much more sustainable by facilitating a united front among allies. However, its effectiveness could be questionable, as it has dialled down U.S’s rhetoric against China which could be read by the latter as a sign of its adversary’s weakness. Though countries like India will stand to benefit from de-risking by leveraging its benefits like attracting supply chains and confronting China’s aggressive moves, it could also come at a cost. With the Russia-Ukraine conflict and the consolidation of the European alliance being the major triggers behind this shift, de-risking could lead to U.S. focus on the Indo-Pacific being diluted, at least for the short term.

Dr. Anand V. is Assistant Professor (Senior Scale) at the Department of Geopolitics and International Relations, Manipal Academy of Higher Education

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China may reopen soon—but ‘millions’ of new COVID cases will disrupt its economic recovery

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China announced its biggest shift away from its tough COVID-zero approach on Wednesday, allowing some COVID patients to isolate at home and ending testing requirements.

The changes back up recent messages from Chinese officials that the country is entering a “new stage” of its COVID response and affirms bullish calls from analysts who expected the Chinese mainland to reopen after years of COVID-era isolation sooner than previously expected. 

On Monday, Morgan Stanley analysts said that Chinese stocks were undervalued now that the reopening of the Chinese economy seems imminent. Investors had already gotten the memo; they’ve been piling into Chinese equity markets based on hints from Beijing that it was preparing to relax some of the country’s strict COVID rules. Hong Kong’s Hang Seng Index is up 30% since the beginning of November. (The Hang Seng Index is still down 37% from its February 2021 peak). Both Shanghai’s SSE Composite Index and Shenzhen’s SZSE Component Index are up 10% since the beginning of last month.

“It is a great opportunity to buy the dips in the next few months,” Winnie Wu, Bank of America’s chief China equity researcher, told the South China Morning Post.

Yet mainland China’s reopening and the inevitable COVID outbreak to follow will likely cause further economic disruption in the first half of next year. Despite their newfound optimism, analysts are warning of a “bumpy” economic recovery ahead.

Beijing relaxes COVID rules

For nearly three years, China has used tough measures to suppress the spread of COVID-19. Officials have imposed multiple rounds of mass testing and district-wide snap lockdowns to contain even a handful of cases. But rare, nationwide protests against lockdowns and constant testing in late November likely accelerated Beijing’s concession that the country needs to move on.

On Wednesday, China introduced new rules that represent the biggest easing of its hardline COVID response to date. China’s State Council announced that those with mild COVID symptoms will be allowed to recover at home instead of in quarantine camps, and people no longer need a negative COVID test to travel or enter most public venues. And while lockdowns may still be imposed, officials will limit them to individual floors or buildings, rather than entire neighborhoods or districts.

Some of these measures were already being carried out by local officials in cities like Shanghai, Beijing and Guangzhou where protests occurred. And last week, Vice-Premier Sun Chunlan, China’s top official responsible for the country’s COVID response, said mainland China was in a “new stage” of the pandemic. Chinese state media had also been laying the groundwork for a shift away from COVID-zero, with Xinhua, the country’s state-controlled news agency, saying “the most difficult phase of the pandemic has passed” in a Tuesday article. 

When will China reopen?

Lockdowns and other COVID restrictions have weighed on China’s economy. China’s GDP grew by just 3.9% year-on-year in the third quarter, below Beijing’s target of 5.5%. The country’s most recent wave of COVID outbreaks and lockdowns are putting it in a deeper hole. Service activity shrank in November to reach a six-month low, according to the latest Caixin services purchasing manager index. Factory activity also shrank in November, extending declines in October. 

COVID-zero is also depressing China’s export market. A hastily-imposed COVID lockdown in one of Foxconn’s major iPhone factories led to protests and disrupted production. Foxconn on Tuesday said the chaos contributed to a 29% decline in revenue in November compared to the month prior. It’s the first time the manufacturer has ever recorded a drop in monthly revenue in the important pre-holiday season.

Beijing may be as concerned about the disruption to foreign manufacturers as it is about the protests, says Alicia Garcia-Herrero, chief Asia-Pacific economist for investment bank Natixis. “China cannot afford to lose the jobs offered by foreign companies,” she says. 

Prior to Wednesday’s announcements, most investment banks pegged mainland China’s exit from COVID-zero to the middle of next year. Even as it deemed Chinese stocks undervalued, Morgan Stanley stuck by an early prediction that the country will reopen by spring 2023, moving to a system where “broad mandatory containment measures and large-scale COVID testing will no longer be adopted” and rolling back many social distancing measures.

But even before Wednesday, the country’s subtle retreat from COVID-zero had prompted some banks to move up their forecasts of a full-reopening—or express more confidence in their bullish calls from earlier in the year. Goldman Sachs forecasts a mid-2023 reopening, but put chances of an earlier reopening at 45% on Sunday, up from 30% in November.

Garcia-Herrero says China might open as early as the end of this year. “We’re assuming the whole of 2023 will be open,” she says.

China’s ‘zigzagging’ economic recovery

There’s a big caveat to mainland China’s reopening: an easing of restrictions will inevitably trigger a large surge in COVID cases unlike anything the country has seen before.

Such an outbreak could have deadly consequences, given relatively low rates of vaccination among the elderly and Beijing’s distribution of Chinese-made vaccines that are less effective than mRNA jabs. According to official data, only 40% of people over 80 have received a booster dose. Studies show that three doses of China’s COVID vaccines are needed to provide the same level of protection against severe illness and death from the Omicron COVID variant as two doses of Pfizer or Moderna’s mRNA vaccines.

China recently pledged to improve vaccination rates among the elderly, which many analysts interpreted as a sign that the country is preparing for a reopening. 

Garcia-Herrero says that China could administer third-dose boosters to 70% of those over 80 by the end of the year “if they really speed up,” in which case the country might open up “right away.” But even in that scenario, she warns, “many people would probably die.”

China could report as many as 20,000 daily deaths from COVID-19 in the spring if it continues to reopen at its current pace, according to models from Wigram Capital Advisors, a macroeconomic advisory group.

A surge in COVID cases, deadly or not, will hamper China’s economy, even as Beijing loosens COVID controls. Ordinary Chinese people, worried about catching the coronavirus, will likely isolate and reduce consumer spending until the outbreak subsides. And those who do catch COVID will stay home from work as they recover, lowering output and disrupting operations. “Lots of people will get sick, which could result in factory closures or facilities being unable to run at full capacity,” Zhang Zhiwei, chief economist for Pinpoint Asset Management, told the South China Morning Post.

Even Morgan Stanley’s more optimistic research note on Monday warned of a “bumpy” recovery. There will be “lingering containment measures, and possibly some zigzagging, during the initial phase of reopening,” wrote Robin Xing, the bank’s chief China economist.

“The combination of rising cases, some regions loosening policies, the winter flu season, and the upcoming Lunar New Year when hundreds of millions of people typically travel makes it difficult to predict how cases, COVID restrictions and mobility may evolve in the coming months,” Hui Shan, chief China economist for Goldman Sachs, wrote in a note on Sunday. 

And a surge of cases might lead to public discontent against a COVID-zero exit from those worried about the surge in cases caused by reopening, warns Garcia-Herrero.

Public blowback may trigger greater volatility and lower growth for the first half of the year. Goldman Sachs predicted in November that China’s economy might grow just 2% in Q2 2023, before rebounding to 10% GDP growth the following quarter as people get used to living with COVID.

Hong Kong’s experience earlier this year is an example of how an uncontrolled outbreak in a COVID-zero territory can wreak havoc on an economy. After two years of isolation and low case counts, the semi-autonomous Chinese city suffered a massive outbreak between February and April of this year. Low vaccination rates among the city’s elderly population led to 9,100 deaths in the first four months of the year, making the outbreak the most deadly in the developed world.

Hong Kong’s outbreak also crashed the city’s economy. GDP sank by 4% in the first quarter, compared to the same period a year earlier. Consumer spending and investment also fell by 5.5% and 8.4% year-on-year, respectively. 

The city still hasn’t fully recovered. The Hong Kong government now expects an economic contraction of 3.2% for 2022. 

An outbreak in mainland China that mimics Hong Kong’s would be massive given the mainland’s size. Goldman Sachs predicts “millions of daily new cases for a few months, which would be orders of magnitude more than the highest number the country has witnessed thus far.”

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