China's economy may be in trouble

Warning signs from different sectors show the government is no longer setting the pace, but scrabbling to clean up the mess

Apologies, no audio version this week as I have a sore throat!

“China’s leaders sweat over ‘difficult to heat’ economy”. So reads the headline from the FT, which claims that the Chinese government is focusing too much on high-tech R&D and not enough on domestic consumption:

“Exports are doing OK, manufacturing investment is still ticking along, infrastructure spending is still slightly positive,” said Fred Neumann, chief Asia economist at HSBC. “It’s consumption that is the weak link here.” China’s economic wobbles have raised questions about whether the soft demand is cyclical — with household balance sheets still recovering from the bursting of a property bubble and the pandemic — or whether the problems run deeper.”

But even some of the positives they’re pointing to are under dispute. Export growth is decelerating. In our last newsletter, we spoke about the problems with infrastructure across China, with bridges as young as 5 years old crumbling under the pressure of extreme weather. Spending may be good, but the infrastructure itself? Not so great. This also goes for infrastructure abroad that China is in charge of building, with a think tank claiming that around $50 billion of infrastructure funding allocated to projects in Southeast Asia has not been fulfilled, with around half allocated to projects that have been “cancelled, downsized, or otherwise seem unlikely to proceed”.

Add on top of this that youth unemployment is still high at around 21% and the housing slump shows no sign of recovery, and it’s clear that China’s economy is in trouble. China is transitioning from an “easy to heat, difficult to cool” economy to one that is “easy to cool, difficult to heat”, according to experts. But what does that mean in reality? People want to know (as always) if China’s economy is on the brink of collapse, and with all the trouble with the stock market recently it seems more likely than ever that trouble is on the horizon.

While we might not be able to answer the billion dollar question right here right now, we can at least point to the warning signs, and assess the government’s attempts to fix them before they become permanent damage.

Saving graces

I have to admit, I’m not an economist or a financial expert, but I think it’s fair to assume that when a government makes a sudden, unpredicted move to correct a certain part of their economy, it’s probably a good sign that the sector is in trouble. For example, lowering interest rates for one-year, five-year, and short-term bank loans in an attempt to stimulate the economy using macroeconomic measures. Or simultaneously announcing that local funding rules will be overhauled to give more power to local authorities, providing a “clear division of responsibilities, coordinated financial resources and regional balance”.

The government is also trying to rescue the housing market, which has been a drag on the economy since the near-collapse of Evergrande. They’ve lowered requirements for down payments on mortgages, and offered 300 billion yuan in funding for local firms and governments to buy empty housing stock. This could then be used as affordable housing for low-income families.

In a slightly more controversial move, the government also announced its plans to gradually raise the statutory retirement age, which currently stands at 50 years for female blue-collar workers, 55 for female white-collar employees, and 60 for all males. The raise could go as high as 65 - a standard in the developed world, but a shock for Chinese workers. Young people especially worry that they may never see their pension:

“But even though the proposal was broadly in line with previous party statements on the issue, it spooked younger people already worried about record long working hours and poor employment opportunities as China’s economy struggles to recover from a property crisis.

This tension spilled over into anger when rumours spread online that the retirement age would be extended to 65 for those born after 1990.

One online commenter said of the younger generation: “Born when they said there were too many people, grew up when they said there were too few, too old when job hunting, now too young to retire.”

Qi, 28, a white-collar worker in Shanghai, said young workers were being asked to work so hard that it was doubtful some would make it to their 60s, and “even if they reach that day, will there still be a pension?””

Some moves are not directly related to the economy, but still raise a beige flag about the government’s sudden policy changes. The resolution following the third plenum reveals plans to lure foreign scientists from abroad, with the potential for new visa options and permanent residency to boost highly skilled talent. This appears to be part of China’s larger plans for private sector reform, which aims to give a boost to firms capable of taking on national level research and development, broadening the availability of resources which are usually concentrated in the hands of state-backed companies.

Long-term vision

But these moves seem calculated to solve China’s short-to-medium-term economic problems: stabilise growth and stop bleeding cash. The real question is, what’s the long-term vision for employment and economic growth? Are the CCP happy with the prospect that there will be no more growth and that the economy may level out before everyone has reached middle income? This view is more than doubtful. But if they can’t solve both immediately pressing issues and future problems, what recourse will they have? Will they continue to use foreign affairs to distract from local woes? How long can skirmishes in the South China Sea continue to top headlines over domestic issues? Who cares about a set of uninhabited islands when your social security is under threat?

Xi wants to double down on high-tech industry and innovation, but even the seemingly sure bet of EV domination is getting pushback from the EU and the US, markets China will rely on as their primary consumers. If even this relatively safe field is under threat, then it's safe to say the CCP will have to carefully consider rebooting the entire economy on new grounds. With the economic trajectory set for now, we may have to wait till 2035 before we see any drastic changes in course.

But enough from me, what do real economic experts have to say on the issue? 

Economist and Nobel Prize Winner Michael Spence gave this analysis on the state of China’s economy in a piece for the SCMP:

There is no replacement for China at the moment, and it will take some considerable time before we're willing to say that China is not the world's factory.

China is the largest trading partner of a very long list of countries. It's probably appropriate to say it's on a decline - a relatively slow decline.

The answer is partly yes and partly no. It's "partly" because they have made heavy investments that will both alter the structure of the economy and increase its already very high innovative capacity.

If [the economy’s] contracting, those opportunities are contracting.

It'll be less bad for China, but it'll be bad for everybody. So that's the "no" part of the yes and no. China can drive a lot of growth focusing mainly on what China calls internal circulation, but we'll all pay a price - including China - if we close down the global economy beyond a certain point.

But where Spence is hopeful, others have their doubts. The Guardian writes that China’s problems are structural, a result of over-concentration on industry and not enough on domestic consumption. Unless China finds a way to overhaul the entire system, improve social safety nets, and absorb all the goods it produces. Due to competition, Chinese firms are forced to lower the prices of their goods more and more, leading to lower profits, lower wages, and fewer jobs overall:

“There are a number of ways this could play out. China might bow to western pressure, voluntarily limit its exports, and recast its whole economic model. This seems highly improbable.

Far more likely is that tensions between the west and China intensify rather than ease. Beijing insists it is not guilty of dumping its excess production on global markets, while Washington and Brussels insist it is. China is already trying to divert exports through third countries in order to avoid western tariffs but has so far resisted the temptation to introduce tit-for-tat measures of its own.”

Silent treatment

Whatever their plans, it’s clear that the Chinese government isn’t ready to share details just yet. They censored comments speaking out about the possible raising of the retirement age, also removing comments referring to the CCP as ‘gangsters’. Former editor-in-chief of the nationalist paper Global Times, Hu Xijin, has been banned from posting on social media, after a post suggesting that the party was planning on de-prioritising state owned firms in favour of the private sector.

I don’t think the party-state has everything figured out yet, but it doesn’t necessarily mean that the Chinese economy is in a state of collapse. They are, however, absolutely in a rocky patch that the government will have to handle in a hands-on manner. Whether these new policies are enough to keep them afloat for now is something that will be revealed at the next five year plan, when they decide to either stay the course, or make a drastic change to basically every sector of the economy.