/Pogled.info/ The Chinese economy disappoints economists. They expected a boom after the lifting of covid restrictions, and now they are waiting for the end of the Chinese economic miracle. Why are the Chinese spending less, what structural problems are dragging the Chinese economy down, and what impact does this have on other economies as well as oil and metals?
Last year, China’s economy fell short of its target of 5.5%, and the country’s GDP grew by just 3%. To understand: in 2021, the Chinese economy grew by 8.1%, and before that there were even higher rates.
However, the failure of 2022 was described as a zero-covid policy, so its cancellation in 2023 created lively expectations of a rapid recovery of the Chinese economy. The world economy was very hopeful for China, which was supposed to boost demand for raw materials along with their prices, as well as generally tighten the world economy. After all, it is one of the largest economies in the world. And at the beginning everything was going as it should, but the data for April spooked the economists. Somewhat very quickly, indicators of the Chinese economy began to show a slowdown. The era of rapid growth in China is over, Bloomberg economists said.
“Throughout the first quarter of 2023, the Chinese economy grew better than expected. The problems started in May when we started to gradually learn the PRC economic data for April. First, the April PMI index was below 50, and then the data came out that showed a significant decrease in imports, including resources. Investors also did not like almost zero inflation, very low lending volumes and not as strong growth in retail sales in April as expected,” said Roman Lukyanchikov, an analyst.
What happened to the Chinese economy? What is holding her back and preventing her from developing? First, the decline in consumer activity is disappointing: at first, Chinese people really started going to restaurants and traveling more, which they could not do for a long time. But this excitement is starting to wane and the Chinese are starting to save again.
According to Lukyanchikov, the Chinese are consuming less for fear of losing their jobs, as the recession in Western countries reduces demand for Chinese exports, which reduces the workload on Chinese factories that employ the majority of the Chinese population.
“After all, the average Chinese worker does not see a wage increase and prefers to save ‘just in case’, especially after multiple, prolonged and sometimes unexpected lockdowns during the coronavirus pandemic in China,” he adds.
The real estate boom and overinvestment that fueled economic growth for more than a decade is over. There are huge debts here. This is one of the country’s many structural problems. However, the Chinese authorities intend to act and plan to revive the real estate market: they announced that they are developing new support measures, in particular, the initial mortgage payment can be reduced, etc.
Against the background of the current economic data, economists remembered China’s main problems, which are actually quite a lot. Among China’s structural problems the economist points to is the country’s dependence on exports, which could decline due to the recession of major trading partners the US and the EU. China has more expensive labor compared to other countries in South and Southeast Asia. “A production worker in Thailand agrees to receive 40% less than a Chinese colleague, and in India the labor of a worker with the same qualification will cost 80% less than in China,” says Lukyanchikov. Hence the decline in foreign investment in the Chinese economy. The demographic problem has not gone away either – the population is decreasing and aging, there will be a shortage of workers.
Another important long-term problem of the Celestial Empire is the rapidly increasing debt of both the state itself and the corporate sector. “The problem is that a significant part of the investment is done by the public sector, which is significantly less efficient than Chinese private business. The public sector owns almost 40% of the country’s assets, but produces only about 25% of GDP. “Instead of intensive development, state-owned companies choose an easier, extensive path, which in order to achieve the necessary economic growth requires much more investment – and therefore loans,” explains the analyst.
According to him, all these problems are bringing China closer to the “middle income trap”. “The only known way to overcome this ‘trap’ is through serious institutional changes (independent judiciary and free media, decentralization of political power, etc.). It was these steps that allowed Japan, South Korea and Taiwan to overcome the “middle income trap” and become highly developed countries. And most of the countries that abandoned such reforms eventually also said goodbye to high economic growth. If China does not repeat the path of its successful neighbors, then the less successful but already promising India, Indonesia, Vietnam, Thailand, Malaysia and the Philippines will take its place,” Lukyanchikov said.
Some Western economists believe that instead of growing at 6-8% a year as it did last year, China’s economy will only grow at 2% or 3% in the coming years. It seems that 2-3% growth is not bad at all, many Western economies where there is either stagnation or recession would envy such growth.
However, given the scale of the Chinese economy in a global context (and it even surpasses the US economy in terms of GDP at PPP), the decline in growth rates from 6-8% to 2-3% is a tangible blow to China , its trading partners and the global economy as a whole.
Every additional 1% growth of the Chinese economy leads to the growth of other economies by 0.3% (IMF calculations), so China’s influence on the world economic situation is difficult to overestimate, Lukyanchikov says. According to him, the slowdown of the Chinese economy will first affect its closest neighbors – South Korea, Taiwan, Southeast Asia and Australia.
The energy market will also suffer. Oil prices immediately went down as soon as the not-so-good China data came out. And after the announcement of the Chinese authorities to support the real estate market, oil prices immediately rose a little. China is the main consumer of this commodity, and the problems in the Chinese economy are instantly reflected in the demand for oil and subsequently in its price. And in this regard, for Russia, which is increasing its oil and gas exports to the Middle East, and in general for the Chinese economy – the largest consumer of Russian raw materials, an economically strong and rapidly developing China is beneficial.
“Metal prices are even more at risk as the Chinese economy consumes about 60% of the world’s iron ore production and about 50% of the world’s refined copper, nickel and zinc production,” Lukyanchikov noted.
“For now, we expect China’s economy to grow by 5.5% in 2023, above the government’s official target of 5%.” The problem is that the decline in GDP growth may not only continue, but even accelerate in the coming years – for example, the IMF predicts the growth of the Chinese economy by less than 4% per year until 2026,” says Lukyanchikov. Those willing to invest in a declining economy will become many times less. Without a continuation of the economic miracle, China will no longer have the strength to compete and defeat its main competitor, the United States. And this is not just an economic confrontation, it is a struggle for global power and influence that will ensure long-term prosperity for the winning country.
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2023-06-06 17:19:06
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