When called upon to provide in-company briefings, your columnist has on occasions quoted Simon Kuznets, a noble laureate. He wryly observed that there are four kinds of countries - advanced economies, emerging markets, Argentina and Japan. Argentina, has for several decades, been plagued with unbearably high inflation, fiscal and trade deficits. Japan, on the other hand, despite serious bouts of monetary and fiscal stimuli, remains in the clutches of price deflation and anemic consumption. Increasingly, there is evidence to suggest the ‘Japanification’ of the Chinese economy. As recent economic data demonstrates, China’s trade shrank by 20% in recent months and its housing sector remains on the brink of collapse.
Real estate in China constitutes a fifth of GDP and is weighed down by a combination of untenable debt and scant demand. Several developers have defaulted on bond payments and many others will do so in the months ahead. In the longer term, with an ageing population and rising costs, China’s growth potential is bound to moderate. Some would argue that China would grow old before it grows rich. Whilst that seems unreasonable, it is true that the trajectory of growth and development over the course of the last two decades can now no longer be sustained. A combination of debt, price deflation and demographic debility has begun to express itself in economic trends.
The key factor limiting China’s longer-term potential is the result of its one-child policy, scrupulously inflicted a few decades ago. Consequently, its workforce is shrinking and, in the absence of a liberal immigration regime, China has enforced limits upon itself as to how rapidly it can grow. In the early 1980s, China’s GDP per person was about the same as that of India; now it is ~13,000 USD. However, there are reasons to suggest that it is unlikely to break out of the middle-income trap in a hurry, something that very few countries have managed to achieve. One could therefore argue that the Chinese marvel is over. Political interference, specifically in the high-growth tech sector, has punctured aspirations and it is hard to tell what the props of future growth will comprise of. Moreover, in the wake of geopolitical tensions with America and European countries, foreign investment too has begun to decline.
Large multinational corporations, with a view to de-risking their supply chains, are moving new investments towards other locations such as Eastern Europe, Mexico, Vietnam and even India. Local governments have historically been the channel through which the Chinese authorities stimulated the economy. This was broadly through infrastructure projects, homes, offices and industrial parks, creating a virtuous cycle with new investments and employment generation. However, this no longer seems feasible, as overzealous spending has resulted in a situation where most local authorities are bankrupt. Even if the central government were to provide a guarantee on new bond issues to local administrations, that would at best prevent the economic decline from rapidly getting worse, but it will not reverse it. In any case, this sort of fiscal trickery can only push the can along but will not address the fundamental problems that impair China’s economy. In the 2030s, its workforce will decline more rapidly, and American sanctions will hurt its prominent tech sector. With all of this in mind, China’s policymakers must begin to realise that their aspirations to be the dominant global power of the century will in all probability remain unrealised.