/ world today news/ China is on the threshold of a choice: either the second economy in the world, which moves towards world leadership and drives the United States, or China becomes the second Japan, which fell into stagnation in the 1990s and could not get out of her for decades. What choice will Beijing make? And what does it take to climb and not fall?
The Chinese economy scares many economists. If Western countries suffer from high inflation and have to raise interest rates to slow down these price rises, China is facing the opposite phenomenon – deflation. The decline in exports and imports of the Chinese economy is also worrying.
Most importantly, China’s economy is now at a crossroads. Much will depend on how the Chinese authorities support their economy today. Namely, according to what scenario China will develop in the coming decades. The stakes are whether China will succeed in becoming the world’s number one economy by 2040, crushing the US, or whether Beijing will fall into the “middle-income trap” and face a “lost decade” like Japan, which is unlikely , that he will ever be able to claim first place in the world?
Deflation was registered in China in July – the consumer price index fell by 0.3%. This was the first decline since February 2021 (when the pandemic began). The producer price index decreased for the tenth month in a row – by 4.4% in July. For the development of the economy, both high inflation and deflation are a problem that is not so easy to solve. Japan itself struggled with price and wage stagnation for a generation, hence the term “lost decade.”
Property prices in China continue to fall. Home sales and housing construction are also down: 18% and 10% respectively in June. This is a major drag on economic growth as the real estate sector, along with related activities such as steel and consumer goods, accounts for about a fifth of GDP.
Moreover, every economic expansion in China over the past 20 years has been driven in part by the housing boom. So if the housing market is in decline, it could be a sign of economic hardship. We can recall the US sub-prime crisis that led to the financial crisis and then to the global recession. But in the case of China, the comparison is more with Japan, where the real estate bubble burst in the 1990s and doomed the country to years of stagnation.
Finally, there is concern about the significant decline in Chinese exports to Europe and the US, and conversely, imports to China.
Why did China’s economy face all these problems and start to slow down?
“The decline in Chinese exports and imports is primarily due to a decline in demand for goods from the Middle Kingdom of developed countries amid a slowdown in their own economies. Second, because of US tariff restrictions that make Chinese exports less competitive. The volume of imported raw materials and parts for production from China is also decreasing, which means a decrease in the activity of Chinese factories and therefore a decrease in the working hours of the majority of the Chinese population, which leads to lower wages and an increase in unemployment. All this turns into deflation against the background of weak domestic consumption growth,” explains Roman Lukyanchikov, an analyst.
The Chinese economy is also under pressure from geopolitical factors. “The global economy is in the process of redistributing markets. The Western bloc of countries has lived for many decades by manipulating monetary policy and simultaneously capturing more and more new markets and is trying to follow the same scenario by momentum. At the same time, in Western countries, some are also “surviving” at the expense of others: the USA is trying to maintain its previous status by absorbing the key resources of Europe – European industry and human resources. At the same time, China is trying to remain among the leaders of the world’s leading economies: it is forming its network of key partner countries for the purposes of trade interaction, building the new Silk Road, which is not under the control of Western countries, and putting forward its own measures for counter-sanctions, in particular banning the export of rare earth metals to Europe and the US, to slow down further technological development of unfriendly countries around the world. All this, of course, affects the domestic economic situation in China, which affects the slowdown in the country’s economic growth,” says Ekaterina Novikova, Associate Professor of the Department of Economic Theory at Plekhanov Russian University of Economics.
The Chinese authorities, of course, see all these problems and have already begun to act. If the West fights inflation by raising interest rates, China, in the fight against deflation, on the contrary, lowers interest rates. On Tuesday, August 15, the People’s Bank of China unexpectedly cut its one-year lending rate to 2.50% from 2.65%, down 0.15% from a post-pandemic record high.
Bloomberg analyst Garfield Reynolds believes that, on the one hand, this suggests that the country’s economic problems are quite serious after the regulator took such drastic measures. On the other hand, there are many reasons to doubt that these measures will return China’s economy to a sustainable growth path. The analyst believes that under such circumstances it was necessary to reduce the rate by at least two times. Moreover, previous interest rate cuts have not led to a noticeable increase in economic activity.
Monetary action from China’s central bank may not be enough. It is curious that at the end of July, at a meeting of the Politburo, general directions of support were announced: stimulation of domestic demand, especially in the segment of household goods and electronics, expansion of incentives for the purchase of electric vehicles, relaxation of requirements for the purchase of real estate along with increased construction for the poor and continued loose monetary and fiscal policy along with less pressure on private companies.
“However, at the time, the Chinese government did not take concrete measures to implement the announced support measures. Chinese authorities have taken a wait-and-see stance, unwilling to include a large stimulus package because of the risk of large debts. However, they will have to make a choice: either continue to grow the economy because of the high debt, or stagnate and then eventually increase the debt anyway, but by an even greater amount than they need now,” says Roman Lukyanchikov.
The risks of inaction are great. “The most negative scenario is a reduction in domestic Chinese demand and an inability to increase exports against the background of continued negative trends in the global economy, continued deterioration of the real estate sector and an increase in the debt burden of the public sector against the background of growing authoritarianism in the country . The country will fall into the “middle income trap” and have “lost decades” following the example of Japan, social tension will be created and China’s annual GDP growth will reach 0% by 2050. This will never allow China to become the first economy in the world. The likelihood of such a scenario is increasing as the authorities slow down the stimulation of the economy,” says Lukyanchikov.
But the more optimistic scenario is real when Chinese authorities finally move from words of support to action. “In this case, Chinese export demand will recover in the coming years, China’s economy will stabilize due to loan growth, but there is an inevitable gradual slowdown in the country’s GDP growth due to the high base effect, as well as stimulating knowledge-intensive and innovative industries , thanks to which China can still become the first economy in the world by 2040”, concludes the interlocutor.
It is clear that Russia as a trading partner will gain more from the optimistic scenario for the development of the Chinese economy.
Translation: V. Sergeev
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