This week, I delved into reports on China, hoping to gain insights into its economic trends. Alas, the reports only revealed how little anyone knows about what is happening in that great nation. A fifth of global GDP is generated behind an opaque veil.
For decades, there has been a China mystique. The country was portrayed as a high-performance economy with a long-term vision underpinned by carefully dosed capitalism, targeted industrial policies, and a political system making decisive moves free from the friction caused by democratic processes.
China helped propel global GDP growth above 4% in the mid-noughties and provided a lifeline to the global economy in 2008-09. Growth and its predictability led to a ‘China premium,’ compelling firms to develop a convincing ‘China strategy,’ from outsourcing production to China to ‘being Chinese in China.’
Whatever China did, this narrative suggests it was wise, calculated, and in complete control. What happened in China only happened because the government intended it. Even blips.
Many argue that this still applies to the last few weeks’ events. If the stimulus package is arriving late, if its rollout is awkward, if its details remain murky, and if the financial markets are confused, it is because the Chinese government wants it precisely so. Once again, the world is being played by a grand wizard.
But what is behind the curtain? China took an unexpected turn during and after the COVID-19 pandemic. The early 2023 euphoria was short-lived. Fast forward: the latest PMIs point to a new low for the economy, with the country facing deflation, the product of persistent supply-side economics.
Cyclical problems are compounding structural ones: an aging population, a faltering export-led business model, political opacity, mounting government and private debt, weak social safety nets (leading to high savings rates), a tech sector curtailed by government oversight, and the need to trim down the oversized real estate sector. Combined, these factors have led to a profound loss of confidence. It has even become fashionable to draw similarities with Japan in the 90s.
Under these circumstances, China's GDP growth rate is expected to decelerate towards 3% by 2029.
Economists generally agree that the cure involves some fiscal stimulus and structural changes supporting consumers and private investment (note the contrast with the US). The need to rebalance the economy from fixed assets investment to the consumer is not new. However, China seems to have a complicated relationship with consumerism and the financial markets.
There are two key takeaways. First, Chinese companies will seek to expand internationally to compensate for the domestic slowdown, with Mexico and ASEAN countries amongst the beneficiaries (electric vehicles, energy storage, renewable energy, …). Second, China’s muted growth in the short term provides an attractive window for competing economies to upgrade their infrastructure, benefiting from less competition for commodities.
As for strategy, a commitment to China remains the right course of action. The country is simply too big to ignore. Besides, aren’t all regions faced with significant socio-economic, fiscal, and political challenges?
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