China’s slowdown is actually helping the West
Liam Halligan
Sun, September 17, 2023 at 2:00 PM GMT+9·6 min read
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A worker in a textile factory in Nantong. Chinese exports are down 15pc year on year - AFP
It “wouldn’t be credible” for the UK to disengage with China.
So said James Cleverly, the Foreign Secretary, during his recent trip to Beijing, the first high-level British visit in five years.
China is the UK’s fourth biggest commercial partner, with combined Sino-British trade up at £107.5bn during the year to March 2023, 11pc higher than the previous 12 months.
These deeper trade links were sunk despite multiple tensions between London and Beijing – including civil liberties in Hong Kong, China’s ongoing support for Russia and, of course, growing concerns about espionage. Just this month it was revealed a Westminster Parliamentary aide was arrested on suspicion of spying for China.
Yet the economic reality is that China has long been the global growth engine. From the mid-1980s until 2010, its GDP expanded 9-10pc a year, then another 7-8pc annually until 2019.
This astonishing growth streak transformed the People’s Republic from an economic backwater into a commercial superpower generating 18-20pc of world GDP. Whatever the political ebbs and flows in relations with the West, China has contributed far more to global growth than the US over recent decades.
But the world’s second-largest economy is now faltering – and has been since it emerged from last year’s incredibly stringent lockdowns. Chinese inflation was just 0.1pc in August, having lately dipped below zero into deflationary territory, amidst plunging consumer confidence and an oversupply of manufactured goods.
During July, falling demand for credit intensified among Chinese firms and households. Exports are down 15pc year-on-year, hit by the West’s cost of living crisis. And Beijing has stopped publishing data on youth unemployment, after the jobless rate among 16 to 24-year-olds topped 20pc.
Some say the Chinese economy itself is suffering from long Covid, with growth falling to 3pc in 2022 and a forecast expansion of 5.2pc this year. More than respectable elsewhere, these are low growth figures for China. And that’s raising concerns that the People’s Republic will cease being a major growth engine, causing the global economy to slump.
Such concerns have lately begun to crystallise. Hong Kong’s Hang Seng Index slid into “bear market” territory over recent weeks, down over 20pc from its previous peak back in January. The yuan just hit a 16-year low against the US dollar, prompting the central bank to spend heavily propping the currency up.
Now it’s all eyes on China’s vast real estate sector, accounting for 25 to 30pc of GDP – a major economic driver, given the extent of the construction and related services involved. But after years of fast growth built on local government and private-sector debt, the recent property slowdown has seen some big developers fold.
Property giant Country Garden is on the brink of collapse while heavily-indebted Evergrande just filed for bankruptcy protection in the US. With around 70pc of household wealth tied up in real estate, signs the property bubble could burst have hammered business sentiment, causing the world’s second-largest economy to stall. And that’s been noticed – with China’s woes now looming large over financial markets across the world.
During the global financial meltdown of 2008, China launched the largest stimulus package in history and was, under Hu Jintao, the first major economy to emerge from the crisis. President Xi, in contrast, has been reluctant to launch massive fiscal rescue measures.
One reason is that government debt, while the numbers are opaque, has spiralled above 140pc of GDP – much of it at the local government level. So the authorities have instead launched waves of smaller measures to boost demand – including less stringent mortgage conditions – as the Bank of China has slashed interest rates.
I read a research note last week claiming that China’s predicament is now “100 times worse than Lehman”, posing a much greater threat to global stability than the US banking and property sector before the 2008 collapse.
I’m not so sure. Ahead of 2008, US real estate was booming, with lots of homes bought on deposits of 5pc or less. So when an overvalued market started to turn, countless distressed sellers emerged who couldn’t afford their mortgage payments. That lowered prices even more – turning a lurch into a downward spiral.
Lending rules in China have typically set minimum down-payment ratios for first-time buyers up at 30-40pc in large cities, rising to 80pc for investors. That points to a residential property market less brittle than its 2008 US counterpart. And while the rules were recently eased, in a bid to boost confidence, first-time buyers and investors still require relatively stringent 20-40pc down-payments.
What’s more likely than a 2008-style collapse in China, in my view, is a drawn-out period of sluggish growth. China’s economic travails are being compared to Japan in the early 1990s, when its huge asset bubble burst, sparking a decades-long cycle of deflation and, at best, insipid economic expansion.
Back then, Japan was also the world’s second-largest economy and an export powerhouse, like China, known for cars and consumer electronics. But as real estate slid during the early 1990s, Japan fell into “lost decades” of stagnation.
I don’t see that happening in China. Still a “middle-income” country in terms of GDP per head, China is nowhere near as wealthy as Japan 30-odd years ago, so has lots more room to grow. Chinese interest rates are around 3.5pc – much higher than crisis-era Japan, so Beijing’s central bank has more room to cut.
And not only is residential and commercial property less “levered” in China than in 2008 America, China is also still growing at a fair lick – slow only compared to its previous decades of mega-expansion, but fast compared to pretty much all other major economies.
For my money, talk of a Chinese collapse upending global markets is premature. On the contrary, for all our political differences, China’s slowdown is, for now, actually helping the Western world.
If China were booming, sucking in millions more barrels of oil each day, then crude prices, already hovering around $90, would be well north of $100 a barrel. And if we are to escape inflation and this ghastly cost of living crisis, then signs of moderate Chinese deflation, making exports to the West much cheaper, are to be welcomed rather than feared.
It “wouldn’t be credible” for the UK to disengage with China. So said James Cleverly, the Foreign Secretary, during his recent trip to Beijing, the first high-level British visit in five years.
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