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Storm clouds loom over the Dragon

China’s performance in the third quarter of this fiscal has raised questions about its economic thinking. For many decades, Chinese economic policy centred around debt-fuelled infrastructural growth, export-led prosperity and manufacturing-enabled internal stability. However, recent news out of China has put into question the foundations of this strategy. With the IMF warning China about ‘Japanisation’ risks, that is, entering a period low growth and deflation,stories about inflation, stalling growth, and a deepening infrastructure debt crisis have only compounded fears. As the government combats record-low youth unemployment and falling exports, the signs are not good.

Based on data from the National Bureau of Statistics, manufacturing in China normalised in the month of September as the Purchasing Manager’s Index grew to 50.2, from 49.3 and 49.7 in July and August. However, the same data also shows an 8.8 per cent decline in exports and 7.3 per cent decline in imports from the year-ago period. Although this can be due to weak global demand, poor performance in external markets causes worry due to weak internal consumption. Weak consumer sentiment has been indicated by China’s slip into deflation in July. As the Consumer Price Index recovered from -0.3 per cent to 0.1 per cent in August and remained flat in September, the Producer Price Index continued its fall by 2.5 per cent in comparison to the previous year. Hence, although the Chinese economy may be recovering, sentiment around it remains cautious, especially due to the crisis in the Chinese real estate sector.

In August, US President Joe Biden called China a ticking time-bomb. This statement was with reference to fears of an infrastructure sector collapse in China due to its opaque and unplanned debt-servicing. Country Garden, one of China’s largest property developers, declared a $6.7 billion loss in late August and recently stated that it may miss offshore payment obligations. This is concerning news, given that the failing infrastructure sector is tied to 70 per cent of China’s household wealth.

Striking parallels with the collapse of China’s Evergrande Group, a property developer that defaulted in late 2021, the current crisis has sent ripples through the economy. New projects have dried up and previous payments remain pending to large firms and small contractors alike. Gavekal Research, an independent macroeconomic research firm, states a conservative estimate of outstanding payments totalling almost $390 billion. Chinese regulators have begun providing policy support to the property market in the form of cheaper mortgages in bigger cities and relaxation on foreign exchange reserve requirements — hoping to avoid a 2008-like contagion devouring the sector whole.

Concerns regarding the position of the renminbi have also surfaced. In early September, the currency hit its lowest value since 2007. This has contributed to outflow pressures due primarily to a widening services trade deficit which had reached $100 billion in 2021. The renminbi’s fall is due to poor economic revival. As vast amounts of local government debt dissuade policymakers from aggressive borrowing, the government has decided to cut key interest rates to fuel internal credit creation. However, the cut in interest rates has also resulted in capital flight to the US, where interest rates are at a 22-year high.

The weakening of the currency has not been beneficial to the Chinese economy as exports are falling. On the contrary, maintaining the 2 per cent price band around the value of the renminbi has been expensive for the Chinese central bank. Furthermore, as the Chinese economy opens and the consumption of foreign oil increases, the falling renminbi will only make the purchase more expensive. In August, news regarding huge Chinese oil purchases was viewed as arising out of a bullish stance of the government regarding internal growth. However, given the fact that most of the volume has been allocated to strategic reserves, we can gather that amid geopolitical tensions, Beijing wants to give itself options, if not prepare for a long winter.

Considering the above economic data, the fourth quarter for the Chinese economy is beginning with two very significant events. First, Russian President Vladimir Putin was in China this week to meet his “dear friend” Xi Jinping to affirm the “no-limits partnership” between the two countries. Second, China hosted a high-level summit to celebrate 10 years of Xi Jinping’s signature Belt and Road Initiative (BRI), touted as the gamechanger in its geopolitical and geoeconomic engagements.

World over, the post-pandemic economic recovery has been sluggish, to say the least. The continuing Russia-Ukraine conflict and the escalating tensions in the Middle East could pose serious challenges to the Chinese economy, which is clearly facing turbulence. Hence, Beijing must make the best of both these engagements to ensure that its partners have faith in the Chinese revival. It will also feel a need to project its power, as analysts worldwide begin to question if the Dragon can weather the storms.

(The writer is pursuing a Master’s degree in Economics, following a Master’s in International Relations, at Manipal University)

(Published 20 October 2023, 19:12 IST)

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