PRC economic woes

an article with graphs

Anyone who has ever read this column or heard me speak knows that I am not a fan of ‘straightlining’ outcomes. We don’t always know where things will be two decades from now, regardless how strongly we believe something. We simply cannot factor in sufficient human variables and actions, each of which create consequences at various rates, to account for the long-term aggregate consequences of change; we can’t do it.

This is true for fearing China’s never-ending economic capability to overcome us by year 2021 or any lots of other things. Humans create variables, meaning to or not, which affect everything in obvious and less-than-seen ways. The complexity of these variables makes modeling tough, if not impossible. We tend to assume those models forming the bases to the straightlining outcomes we so often lock into with unjustified but whole-hearted confidence. I confess to being guilty of confusing my personal fears or preferences for nuanced analysis more often than I would like, as if I were able to say being at point R today guarantees we will get ot point S tomorrow afternoon.

At the same time, I highly recommend the Wall Street Journal’s article today on eight factors from which Beijing’s economy is deriving challenges. I won’t regurgitate their explanation but I will adorn slightly the topics of the eight charts mentioned in the title: falling consumer prices, real estate as a cash cow, the laudatory success of the ‘One Child’ policy and incredible failure to end it, even greater government debt than the United States, foreign investors falling out of love with China while they move on to suitors for their futures, increased PRC trade barriers to protect industries, general PRC economic slowdown, and substantially decreased consumer confidence in the Party’s smarts on managing this behemoth of an economy. Any of those alone is quite an item to address but all eight in concert is a mess.

Oh, my. No wonder Xi is increasingly paranoid, as my husband noted at a Rotary Club presentation this morning, as the Chinese leader sees things that were seemingly unstoppable appear far less salutary these days. I would add that description applies to foreign and domestic topics looking a bit less positive, if not downright negative.

However, knowing which variables to watch for quick remeditation is pretty important as well. Consumer confidence can shift quickly in any society but China is a risk averse place, for all our anxieties about their actions worldwide. The past four years have been harsh for Chinese citizens as they have weathered lockdowns far more draconian than anything we ever tried. The wild Chinese stock market we have heard about over the years? It has been a rollercoaster but, then again, was always more of a gambling scheme than a vehicle to raise capital in a state-centric economy. It will take a while for the population who the government hopes to mollify to feel markedly more confident.

The debt is likely to grow as the government continues pumping cash into they system to generate employment opportunities. China’s leaders fear social unrest, particularly young unemployed me, more than pretty much anything else. The current level of debt as 300% greater than the gross domestic product (if one believes PRC official statistics which is another entire subject) would seem likely to increase rather than decrease in the near term. The number of ‘ghost cities’, under-used factories, and other features of a state-centered economy will also proliferate. Xi has priorities of which economic reform is far from the top.

Foreign investors began reconsidering China as a destination because labour costs began rising around 2008 but Xi’s march towards a CCP-centric China has undermined the irrational exuberance characterising foreign investment for two and a half decades. This CCP-centric regulatory environment is capped by a profound sense of uncertainty and distrust for and by foreigners in the PRC, meaning that other options such as Vietnam, look both more appealing and safer.

Demographics, as we have discussed, won’t change easily. Chinese women don’t want to bring more children into the world, despite urging from the General Secretary. Attendant will be higher labour costs as fewer workers are available for jobs. This point is rather interesting since we know that college graduates were unable, in many cases, to secure jobs upon graduating last summer but that might well be a far greater indication of the mediocrity of the PRC university system than the number of jobs available for college-educated people.

In short, there are some structural problems this economy will have to correct before China has any chance of returning to its double digit growth rates. The economy is still growing but at a more ‘mature economy’ rate of under 5%. They likely will never again claim 12% growth as they did around the turn of the millennium.

The real question is whether they can build a sustainable, growing economy that matures as the population and the nation’s needs change. Sounds easy but I think it will be much harder than we realise because of the unfettered expectations stoked over decades by the Party. Actions create consequences.

Thanks for reading these thoughts by a non-economist who studies China. Again, read the Douglas piece for some graphics on these multiplying, as he phrases it, issues. I welcome your rebuttals, thoughts, and suggestions. I appreciate each of you taking time today, especially those of you who contribute financially.

Another hint of spring…

Be well and be safe. FIN

Jason Douglas, ‘What’s Wrong with China’s Economy, in 8 charts’, wsj.com, 1 March 2024, retrieved at https://www.wsj.com/world/china/whats-wrong-with-chinas-economy-in-eight-charts-efc2ea5f?mod=lead_feature_below_a_pos1