During this first quarter of the 21st century we have become accustomed to China driving global economic growth. The world’s economists have overcome cognitive dissonance to become comfortable with an autocratic, hierarchical government being able to improve living standards for hundreds of millions of people in a matter of two generations, while dozens of countries in the global south have accepted China’s investment via the Belt and Road or other bilateral agreements, hoping some of China’s magic formula will rub off on them.
According to the International Monetary Fund, China will contribute a curiously exact 22.6% of global economic growth in the five years to 2028, ahead of India and the US, Europe and the rest of Asia.
Figure 1: Share of World Economic Growth 2023-2028. Source: International Monetary Fund
But overall growth is likely to be slower in this five years than in the preceding five years, disrupted as they were by Covid, or the five years before that – a brief period of relative normality between the GFC and the pandemic, in a time before AI tried to write your homework badly and before exploding pagers and the resurgence of imperialism.
China meanwhile has struggled to accelerate away from the enforced hiatus of the pandemic. I have written several times over the last two years about Beijing’s various attempts to prod the sleeping dragon into wakefulness. Government announcements in September repeated previous attempts to rouse the slumbering economy, including a cut to the reserve ratio requirement and the mortgage rate for existing housing. These increase credit risk for lenders and do little to create employment or raise wages for young people in China who cannot afford to buy a home, thus putting off marriage and adding to the population drag on the economy.
The central bank insisted that the reductions will cut costs for 50 million households, boosting disposal spending capacity by RMB 150 Bn a year (about USD 21.28 Bn), but that is equal to only 0.1% of the value of China’s USD 17.8 Tn economy. The measures are not going to fix the structural flaw at the centre of China’s economic plan which is this: how do you switch from an export led economy to a consumer economy when your pool of consumers is shrinking?
At the plenum earlier this year, the then-Premier Li Qiang mentioned AI and the digital economy at least a dozen times as a key feature of China’s future economic growth. The latest increase in moral hazard will do nothing to encourage the kinds of productivity growth that technology could deliver. Discouragingly, any productivity growth that technology might deliver would not necessarily boost shipping demand.
And while the latest government intervention in the stock market, allowing insurers to invest more in equities, might support stock prices, the real world in China remains one of consumers made cautious by deflation, of unsupportable youth unemployment and of deteriorating trade relations with key western counterparties.
It is then no wonder that analysts and investors are calling for more government action – for looser monetary and fiscal policy, which is effectively calling for a transfer of risk from the private sector to the public sector.
The Chinese government is apparently discussing yet another round of economic stimulus, stung perhaps by the kinds of forecast that UBS released a few days ago in which Chinese GDP growth falls by 2.5% because of US tariffs as high as 60% on Chinese goods - assuming Donald Trump has won today's US presidential election. China is offering free trade deals to a variety of countries, but altogether these cannot replace the US as the preferred destination for Chinese manufactures.
It is simultaneously ironic that while the nation thought of historically as the most economically liberal and as the leader of the free world debates stepping back from that role, the world’s most successful command economy with a quite different view of individual liberty emerges as the world’s leading proponent of free trade. China now has more free trade agreements (FTAs) than the US (22 against 14).
China has FTAs with ASEAN, Australia, Cambodia, Chile, Costa Rica, Ecuador, Georgia, Hong Kong, Iceland, Macao, the Maldives, Nicaragua, New Zealand, Pakistan, Peru, Serbia, Singapore, Switzerland, and Taiwan. It is negotiating FTAs with Honduras, Israel, the Gulf Cooperation Council, Japan, Moldova, Norway, Palestine (via the essentially defunct Palestinian Authority), Panama, Peru, South Korea and Sri Lanka. Early FTA contact has been made with Bangladesh, Canada, Colombia, Fiji, Mongolia, Nepal, and Papua New Guinea. China is also a member of the Asia-Pacific Trade Agreement.
If China is about to enter a trade war with the US, and / or the EU, it is on a charm offensive with the Global South, with non-aligned nations and even with the US’s neighbours. One notable absentee from the list is Mexico, which has imposed tariffs on hundreds of Chinese imports even as it has benefited from billions of dollars of investment from China to become China’s entrepot to the US. I wonder why.
China is also stuck because on the one hand it would prefer a Trump presidency which might bring the Ukraine war to an end in Russia’s favour, allowing it to put a little more distance between Beijing and the Kremlin, while on the other hand, it might prefer a Harris presidency which would probably hit China with fewer and lower tariffs. On balance, Beijing probably prefers Harris. But she cannot solve China’s demand problem.
Meanwhile, domestically, China remains stuck a pattern of recapitalising and refinancing technically bankrupt local and provincial institutions, governments and corporations. Calls for fiscal handouts - tax cuts or even cash support to households – are growing. But these can only be a salve for a wound, not a cure for an illness.
This problem is structural. China cannot export its way out of trouble any longer. Meanwhile, China’s system of government and economic planning has not spawned quite the levels of consumerism that were anticipated. Chinese individuals still have high savings rates. Recent changes to family-formation policy have not increased the birth rate. The number new of consumers joining the economy each year is already shrinking as the population ages and births fall. Chinese consumer confidence sits at around 85 points, well into the sub-100 range of pessimism, where it has languished since the second quarter of 2022, when it collapsed from around 120 points.
Globally, consumption represents 75% of GDP but in China only 53%. To get people to spend more, China will need a completely reformed welfare state which means higher taxes (income tax rates are comparatively low while non-employment income is taxed at a flat 20% rate) and more anti-corruption enforcement. An older population is a fiscal drag too: in the UK, people aged over 65s represent 19% of the population but consume 51% of the NHS budget. Their cohort is expected to grow to 24% of the population by 2043. Nothing the Chinese government has said since Xi took power gives us reason to believe that such reforms are forthcoming.
For the foreseeable future then, we expect periodic fiscal and monetary loosening, soft loans and subsidies to continue to provide support to importers of energy and raw materials, and some support for exporters in the face of ratcheting trade wars. Shipping will get some demand support from these actions. But - and it's a big but, given Chinar's dominant role in shipping over the last 25 years - shipping can no longer bet on the Middle Kingdom now that its population and economy are maturing.
There is one further option for the Chinese government. A third way to grow a national economy, apart from domestic consumption and exports, is to expand the territory of size of the nation and thus increase the population. This was a popular policy among European nations in the 16th to 20th centuries. Taiwan's economy is estimated to be around $1.77 Tn in 2024, with a per capita GDP of $72,485. Taiwan's economy is ranked 20th in the world by purchasing power parity (PPP) and 21st by nominal GDP. This of course has not escaped President Xi's notice.
Comments