The terrifying challenges facing the Chinese economy are admitted by Beijing itself through the mouth of the advisor to the powerful president of the country.
In particular, at an economic forum last week in Shanghai, Liu Yanchan, a senior adviser to the Chinese government and president of the Shanghai University of Economics, noted that the effects of the pandemic were much worse than expected and that the fiscal situation of the of local governments is deteriorating faster than the government expected.
It is noted that such remarks are very likely to have passed the approval of China’s President Xi Jinping himself.
Structural changes are occurring at a rapid pace and more non-economic risks are emerging than economic ones, the Chinese adviser said. All of this has created imbalances that Beijing is struggling to address.
According to Liu, China’s development in the recent past and in the near future will be characterized by such an imbalance, and achieving a new balance will take time.
These internal challenges, as well as external competition, are more formidable than a decade ago, when China managed to achieve double-digit economic growth.
Growth now is much more uneven, of course, and even President Xi seems to have admitted as much when he called modest growth the… “new normal”.
Indicatively, the producer price index (measurement of the monthly change in the prices of industrial products produced in the country and available on the domestic and foreign markets) in China decreased in March by 2.8%. The supply-demand imbalance is also evident, with the first quarter utilization rate sitting at just 73.6%, down about 7 percentage points.
Liu also warned that the consumer price index, which rose 0.1% year-on-year in March after expanding 0.7% in February, was too lackluster to achieve the targeted 2-3% supply-demand balance of Beijing.
Most importantly, these changes are here to stay.
Particularly notable is the downturn in the real estate market. Investments in the real estate sector fell in the first quarter of 2024 by 9.5% year-on-year, with total sales falling by 27.6%. In other words, the days when the real estate sector was a “super pillar” of the Chinese economy are over.
The sector accounted for nearly 11% of GDP, but was down to nearly 6% by 2023.
Beijing is looking to other sectors such as high-tech manufacturing and electric vehicles to fill the void, but so far they have some way to go.
The main question
According to American political scientist George Friedman, what makes Liu’s statements so important is that they show that Beijing is finally coming to terms with the obvious.
“The long-held conventional wisdom was that China would be an endless wave [ανάπτυξης], but even at the height of development, its economy was limited and unbalanced. But the economic risks are widening amid geopolitical uncertainties, the root of which, for China, was a decision a few years ago to threaten the US with possible future military action. The threat was an unrealized bluff, but its most important effect was to convince the US that it was real.”
Under these circumstances, Friedman explains, the US government adopted a hostile economic stance towards China, and US companies saw increased risk if they did business in the dragon country.
“Instead of increasing economic activity to appease the US, Beijing has sought the opposite effect, limiting its access to US investment. This created another imbalance, one based on the assumption that Chinese exports to the US and US investment in China would not fall low enough to seriously threaten the economy.”
The question for the American analyst, however, is how private industry will respond and more importantly how the Chinese people will react.
“In China, economic turmoil can create desperate citizens and launch the country into uncharted territory,” Friedman said.
“The government is working hard to contain the turmoil and it seems that it has now adopted a strategy of candor – a rare thing for any government” observes the American political scientist.
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2024-05-12 19:30:20