Economic Clouds Gathering on China’s Horizon
By Yan Naing 23 September 2020
Officially, China remains cautiously optimistic about its economic growth prospects in spite of the global pandemic, insisting that the world’s second-largest economy is steadily recovering from a virus-induced slump. However, analysts say policymakers will have a tough job maintaining a stable expansion over the next several years as the country looks to join the ranks of high-income nations.
President Xi Jinping said recently that China’s economy remains resilient and that Beijing has ample policy tools at its disposal, despite rising external risks.
“The basic characteristics of China’s economy with sufficient potential, great resilience, strong vitality, large space for maneuver and many policy instruments have not changed,” state-run Xinhua news agency quoted Xi as saying.
“We must seek our development in a more unstable and uncertain world,” he said, urging calm amid rising difficulties and challenges. “The great rejuvenation of the Chinese nation can never be achieved easily with the beating of gongs and drums,” he said.
The Asian Development Bank said recently that China—whose central city of Wuhan, in Hubei province, was where the global coronavirus pandemic began—was one of the few economies in the region bucking the downturn. It forecast China would grow by 1.8 per cent this year and 7.7 per cent in 2021, with “successful public health measures providing a platform for growth”.
At a deeper, structural level, however, China’s economy is facing an uphill struggle.
China recorded its lowest GDP growth in almost half a century in 2019, at 6.1 percent, and 2020 has only been worse. As the country’s economic might began to wilt, Beijing in the first quarter of this year openly acknowledged an economic downturn for the first time since 1976, with the National Bureau of Statistics announcing on April 17 that the economy contracted by 6.8 percent compared to the same period a year earlier. Surprisingly, during the annual National People’s Congress of the Chinese Communist Party (CCP) on May 22, no GDP growth target was announced for the first time in 30 years. Officials cited “great uncertainty” caused by the coronavirus pandemic, an acknowledgement of the steep challenges the country faces amid a struggling economy and increasing international hostility.
China’s GDP saw double-digit growth every year from 2003 until it peaked at 14.2 percent in 2007, but has been in a long decline since then. By 2018 it had dropped to 6.6 percent, followed by 6.1 percent in 2019. However, the COVID-19 pandemic is not to blame for this meltdown; it merely aggravated the difficult situation China’s economy was already in, but which the CCP has sought to camouflage with its propaganda.
Experts note an even more serious development. Large banks such as the China Construction Bank and the Bank of China recently posted their biggest profit declines in a decade. While official figures put the drop in GDP at 6.8 per cent, the actual figures are likely to be higher, despite—or because of—the government’s US$559-billion (about 736.3 trillion kyats) revival package.
The reasons for the decline lie in the fundamental problems with the Chinese economy, which have accumulated over the years: excessive investment, low labor productivity, modest consumer spending and demographic changes. In the 1990s and 2000s, China created wealth in a way that was appropriate to that time. Factories grew, producing competitive products for the whole world; miles of bridges and roads were built connecting cities and towns. These in turn created jobs and income-generating opportunities for the population, while expanding the productive potential of the economy. But such methods do not always increase a country’s growth potential: bridges and roads are literally being built “to nowhere”, just like “ghost towns”.
In addition to excessive infrastructure costs, China is also increasing consumer and industrial spending by expanding its credit availability system. The country has accumulated a huge amount of debt, not just internally but externally as well. In 2019, China’s total corporate, household and government debt rose to $40 trillion. This is about 300 percent of its GDP and about 15 percent of all world debt.
Heavy Chinese government borrowing led S&P to revise its estimated debt-to-GDP ratio to 273 per cent. Corporate debt, in particular, is massive, causing a closed loop of bad loans and bank stress. Data suggests that delays are likely in some Belt and Road Initiative (BRI) projects due to the pandemic, including in Pakistan, along with the cancellation of mega projects such as a $10-billion refinery by Saudi Arabia, while major powers have declared their intention to “decouple” from China.
As the economy begins to decline, many industries and enterprises in China have shut down, leading to massive layoffs, slowing wage growth and boosting unemployment. While the rate of unemployment was 5.3 percent at the beginning of 2019, the pro-government newspaper Global Times published a forecast as the year came to an end that the situation in 2020 would only get worse, with unemployment rising further and wages falling. The latest reports now point to 80 million workers being jobless post-pandemic; another 8.7 million joined the ranks of job seekers this year.
Over the past two years, the size of the Chinese consumer goods market has declined as the purchasing power of the population has fallen. Demand is declining for cars and real estate, and in other sectors accustomed to double-digit annual growth. The situation is aggravated by the huge income disparity between the wealthy coastal regions and the hinterland.
On May 28, Chinese Premier Li Keqiang admitted that there are over 600 million people in China whose monthly income barely reaches 1,000 yuan (about 194,000 kyats), which is not enough to rent a room in a Chinese city. If one of the top leaders of a communist state—one that is always seeking to hide its shortcomings—makes such a statement, then it can be safely assumed that this is just the tip of the iceberg.
Additionally, China’s demographics are not conducive to economic growth. China is aging—its working-age population has been shrinking since about 2012. As the inevitable result of the 1979 One-Child Policy, according to experts, retirees will make up over 40 percent of China’s population by 2050. This will test the CCP’s ability to provide a decent life, stability and employment for its young people. These elements formed the basis of Xi’s “Chinese Dream”, under which China set itself the goal of eliminating poverty throughout the country by 2020 while improving the quality and standard of living for all its people.
However, the first nine months of 2020 demonstrate that this goal is far from being achieved, given the economic meltdown. Maintaining the pace of growth is going to be difficult in a pandemic-hit world. China is experiencing a major food crisis after heavy flooding hit farmlands, pushing the second-largest wheat producer in the world to import heavily. Domestic soya prices have doubled 30 per cent despite the release of inventories. China cannot feed itself, and imports of US corn are at their highest since 2014.
The economic crisis has led to a political crisis; a massive crackdown is underway to muzzle dissent. As a part of this, Xi—who, after getting rid of 1.34 million party officials in the name of corruption in his first tenure, in 2018 made himself president for life of the supposed “People’s Republic”—has ordered a fresh round of purges to eliminate potential rivals. In early September, marking a major shake-up in the country, over two dozen police and judicial officials were placed under investigation. This followed the removal of dozens of officials from their posts in August.
A senior ally of Xi told the Wall Street Journal it was time to “turn the blade of a knife inwards, cure the poison by scraping it from the bones” in order to cleanse the country’s justice system of corrupt elements and purge officials who only paid lip service to the CCP.
According to the WSJ report, millions of party cadres are potentially at risk of being targeted.
Yan Naing is the pseudonym of a regular observer on Myanmar affairs. The views expressed are his own.
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