“Because most Chinese are satisfied with the economy’s performance, Beijing would probably resist major adjustments in savings, consumption and investment incentives that did not serve its industrial policy goals.
“Only the prospect of closed foreign markets or deep recession at home, neither of which Beijing believes is likely in the near term, would change this view.”
The assessment by the US’s Central Intelligence Agency rings true – except it is dated 1986 and was about Japan, then a rising Asian power. Rather than rocketing to “Japan as number one”, as one book at the time warned, its economy would soon suffer property and stock market implosions from which it has never fully recovered.
As with most analogues, Chinese and Japanese parallels only go so far.
China, of course, is increasingly America’s paramount strategic rival. Japan still hosts 85 US military bases – many of them aimed at countering any Chinese threat.
China already produces close to a third of the world’s manufacturing, or double the US’s share and nearly five times Japan’s. Every second tonne of steel has been made in China for a decade, while Japan’s share peaked at just over a third in the early 1970s.
Still, as analysts such as Michael Pettis, a professor at Peking University, have long pointed out, China’s economy shares many similarities with Japan’s. These include an overreliance on construction and a dependence on export markets to absorb excess supply, a rapidly ageing and shrinking population and a curious resistance to spurring domestic consumer demand.
All nations have a stake in how China’s economy fares in coming years, whether as a source of demand for commodities from exporters such as Australia, or a competitor for virtually any manufactured product.
Global efforts to slow and even halt climate change hinge to a large degree on whether China can keep driving down the cost of solar panels, wind turbines and batteries that store renewable electricity and power cars.
Renewed signs of deflation
In an economy where transactions are almost entirely digitalised, companies – and presumably the Chinese government – have an ability to track activity more precisely and in real time probably unmatched in history. Foreign firms have invested in many Chinese operations – even if those investments are now reversing at a record clip – providing outsiders a line of sight on trends they never had with the Soviet Union.
China, though, isn’t always keen to clarify the health of its economy. Authorities stopped providing youth unemployment figures when the jobless rate exceeded 20% in June 2023, only to release a revised dataset, the Economist noted this month. US treasury officials, too, have been puzzled by a discrepancy between customs and foreign exchange data of the size of China’s surplus that has ballooned to $US230bn ($A342bn) from an average gap of $US7bn since 2000.
Numbers that have lately most alarmed financial markets include renewed signs of deflation, including the longest stretch of falling prices since 1999, Bloomberg reported this week. Cheaper Chinese products may help western nations – including Australia – rein in inflation, but they won’t be so welcomed by trade-exposed factories in those nations.
Visitors to China leave with impressions that – confusingly – point to an economy boosting awesome technological advances but which also seems to be in a funk.
Cities even in remote regions are filled with new cars, the vast majority of them built in China. More than one in two car sales are now electric vehicles, with China accounting for 60% of global EV sales in 2023. (EV exports will probably accelerate rapidly unless trade barriers in the US and Europe stall them.)
To get to those distant areas, travellers may ride on the 40,000-plus km high-speed railway that likely exceeds the rest of the world’s combined, or by car on the similarly vast network of highways. Shanghai’s metro, meanwhile, boasts 20 lines and 508 stations – versus a mere nine lines and 142 stations in Tokyo.
Along the way, though, discordant signals abound. Few cities lack rapid rail or road connections – let alone more airports – that appear to justify construction on the gargantuan scale of past decades.
Each city, too, has a varying number of so-called lanwei (“festering tail”) buildings where work appears to have halted midway. Property prices, which have dropped as much as 40% in some cities since 2021, can hardly be revived when clusters of unfinished apartments dot the horizon.
‘The biggest concern now is mortgage prepayment’
The business model local governments have relied on – namely selling land to developers – will be costly to replace.
One temple complex near Taiyuan – a central city of about five million people – offers one modest vignette. It has built a stunning hall to showcase exquisite woodcarvings, but can’t open to the public; a nearby road has collapsed because of past mining and local authorities can’t find the funds to repair or re-route it.
Chinese people clearly have the means to spend big, as LVMH – owners of luxury brands such as Louis Vuitton, Tiffany & Co – can attest, even if sales are lately on the skids.
Economists such ANZ’s Xing Zhaopeng say consumers have been opting to repay debt early even though China’s central bank has been steadily cutting interest rates.
“For consumption, the biggest concern now is mortgage prepayment,” Xing said. “We estimate 600bn yuan ($A125bn) of early prepayments per month, which is equivalent to 12% of retail sales and 15% of disposable income.” Those sums are in addition to normal repayments levels of about 200bn yuan.
One prompt is the lack of alternative places to park the money. While Chinese stocks are yet to match Japan’s post-bubble crash – with the Nikkei 225 share index taking 35 years to its 1989 peak – they are at their lowest since January 2019, Bloomberg says.
Australian firms hopeful of a rebound in demand as China progressively removes punitive tariffs imposed in 2020 on about $A20bn/year of exports may be disappointed unless consumption picks up.
Exporters may face much bigger woes. Chinese factories have been stockpiling commodities that they are beginning to resell “at very low prices”, Xing says.
“Our China commodity price index is now 5% lower than a year ago and 35% lower than two years ago.”
Iron ore and oil make up more than half of that index, and both have been on the slide as economists pare back hopes China can achieve its 2024 GDP growth target of “around 5%”.
Iron ore – Australia’s biggest export – dropped below $US90/t this month to its lowest level in almost two years while oil prices have been hovering near three-year lows.
Cheaper fuel may be good news for non-EV motorists, but falling commodity demand is a headache for governments such Australia’s. Bumper prices played a big role in helping deliver Australia’s first back-to-back budget surpluses since 2007-08. But, each $US10/t decrease in the iron ore price alone lops about $500m from the budget and $5.3bn from Australia’s already anaemic GDP growth.
The Reserve Bank has said Australia’s economy “is running a little bit hotter than we thought previously”. It has also warned that “the risks to Chinese growth remain tilted to the downside”.
If those risks are realised, RBA interest rate cuts will happen sooner. The result may not be something to celebrate if it’s because China’s slowdown has gone global.
