"China has run out of rice." And we're not exactly talking about cooking. The phrase is from Alicia García Guerrero, chief economist for Asia Pacific at Natixis, based in Taipei.
The Chinese dragon, the world's second largest economy (called one day soon to become the first), the world leader in exports, the world's leading manufacturing center, the country that aspires to rival the West in technology, perhaps the greatest economic success story of modern times with dizzying growth in just twenty years... is experiencing one of the most difficult economic times in its recent history.
While the world is fighting inflation, in China they live the other way around: the danger is deflation, with a CPI that is at zero. A scenario that recalls the long stagnation that Japan experienced after the bursting of its real estate bubble. Domestic demand is stuck. There is excess capacity and inventories and businessmen find themselves with excess merchandise.
And external demand is also weak. During the covid, the Chinese economy was in charge of selling to the world (it came to weigh 20% of exports), but now the external pull is already running out of steam. In June, Chinese exports fell 8.3% year-on-year, their biggest contraction in three years. Beijing admits that it is an "extremely serious situation".
As for the real estate sector, which according to some estimates could represent up to 30% of GDP (with its direct and indirect components), is trapped in debt.
Evergrande, the most indebted promoter in the world, has registered losses in the last two years of more than 70,000 million. New house prices have been falling for fifteen months, the longest downward streak since there are records, in 2011: another deflationary factor for the economy, when housing is one of the largest investment vehicles for Chinese families.
Mistrust spreads. With growth of 0.8% in the second quarter compared to the previous year, the question is whether this pace is enough to keep the population happy. “I have just seen super-luxury department stores full, with people buying, Teslas, Porsches, Bugattis, Ferraris, etc. … but only in the richest centers. The middle class, on the other hand, has a hard time”, says a Catalan businesswoman who works with China.
"The real problem is that a generation of Chinese has never lived through a bad situation: it has only known twenty years of exponential growth," says Louis Kuijs, Asia Pacific economist at S
"There is a lot of mistrust, among other things because the welfare state in the country is not yet sufficiently developed and citizens do not want to spend excessively or take initiatives," he adds.
The situation is especially hard with the youngest. The youth unemployment rate is at all-time highs, more than 20%, with 10 million university students who each year leave the faculties in search of employment. Unwilling to revolutions (the Tienanmen Square massacre teaches), protected by their parents' savings, many of them are beginning to be tired (or rather discouraged) of the cult of obsessive work like the previous generation.
The “lie down” movement emerges, that is, the rejection of the draconian working hours of nine to nine six days a week: work less, enjoy life and settle for what one has. The well-being achieved in these years is changing the habits and values of a society increasingly installed in the middle class, but which, paradoxically, neither wants to work excessively nor wants to consume.
Gilles Moëc, chief economist at Axa Investment Managers wrote in a recent note that “the situation reflects an inability to fully shift the engine of the economy towards consumption, in what would be a normal step for a middle-income country seeking to mature. And asking for another spending effort from local governments is probably impossible, or at least dangerous from a financial stability standpoint.”
In effect, Chinese leaders find themselves with few tools at their disposal. There is a clamor for stimulus measures to be put in place, but the margin is narrow. The fiscal deficit aims to exceed 11% of GDP and China, which has a per capita income of 12,000 euros, is the economy of this size with the most public debt, which is on its way to reaching 100% of national wealth. In short, there is no real plan B when it comes to the economy.
The Chinese private business sector is not going through its best moment either, punished by the regime with successive sanctions and fines. The fall from grace of the charismatic Jack Ma (Alibaba) is a reflection of this change.
This uncertainty inevitably ends up affecting foreign investment, which fell last year –with covid restrictions– to its lowest in 18 years. In 2023 the flow has picked up, but at an insufficient rate. 73.5 billion dollars were recorded in the January-April period, 3.3% less than a year earlier, according to data from the Ministry of Commerce. "We must bear in mind that China has not been a low-wage country for a long time, as a competitive advantage when it comes to relocating production," underlines Louis Kuijs.
In this context, “China is going to convert from an economic power to a soft power”, predicts Alicia García Herrero. “In Beijing they are aware that they have to look for another ecosystem, to have influence in the Global South. But with a leadership based more on the strength of ideology than on economic leadership”. The ambition is no longer to lead the world, but to lead neighboring countries.
This is not rapid change (the economy has to follow a plan), nor does it mean that China runs out of assets or assets. The silk road is still formally standing. Technological advances (from renewables, through electric cars and even semiconductors) continue to be part of the strategy. “China aspires to become the benchmark for the Global South, although it will always do so through economic agreements,” Louis Kujis qualifies. “Still, China has to start writing the second chapter of its economic story,” he notes.
A blank page, yet to be written. “China may have a GDP similar to the US in 2035. But its potential will stay there. Neither will it have a world reserve currency like the dollar, nor will it be a military power”, predicts Alicia Guerrero. At a time when globalization seems suspended and trade barriers are tightening, "Beijing will have to find its space, its zone of influence," she concludes.
In a statement to the Financial Times, Arthur Kroeber, a partner at Gavekal Dragonomics, summed up the thinking of the Chinese elites this way: "Xi Jinping does not define economic success in terms of GDP growth, but in terms of technological self-sufficiency." The dragon that wanted to conquer the world is now simply content to depend on no one.
