China: “common prosperity’ will have to wait a little longer…
This column was previously published in L’Express on 24th march 2022
The National People’s Congress has produced a recovery plan replacing “common prosperity” by economic stability. This new direction takes no account of the three problems facing Beijing.
The Communist Party’s annual “two assemblies” event ended on 11th March and reminded us that, as is very often the case in China, what is left unsaid is as revealing as anything contained in long speeches. During the whole week of congress, there was not one single mention of the “common prosperity” that government propaganda had been promising throughout 2021.
On the other hand, Prime Minister Li Keqiang took pains to mention the term “stability” no less than 76 times, undoubtedly with the deliberate intention of concealing the current instability of the Chinese economy. However, the Chinese financial markets were far from reassured and saw in this yet another reason to be worried by the three problems already pointed out by the Prime Minister and to which, up to now, there has been no convincing response.
It is estimated that the new Covid-related lockdowns will impact on almost 50% of GNP.
A slowdown in domestic demand
The first problem is the slowdown in demand, which has been present since the summer of 2021 and can be seen both in terms of domestic consumption — which grew by less than 2% during the month of December last — as well as private sector investment, which is struggling to obtain bank loans. It is also the case of exports for, although they remain the principal driving force behind growth in the Chinese economy, they are undergoing a slowdown of 15% that is liable to be worsened by the conflict in Ukraine.
Secondly, supply is malfunctioning. It is China’s turn to face the Omicron variant, which is forcing new and repeated lockdowns. It is estimated that these are currently having an impact on almost 50% of GNP. Digitized services are still awaiting a new regulatory framework, and the government continues to directly target the most successful enterprises in the sector, like Didi, the “Chinese Uber”. Furthermore, because of the energy crisis of September 2021, there has been no other option than to make a speedy return to the use of coal and to postpone the objectives with regard to the fight against global warming.
The objective fixed by the government will require a return of confidence to the private sector.
The third problem is that the players in the economy have lowered their expectations, and this is undoubtedly the most worrying factor with relation to China’s future growth, since the traditional thrust behind growth is the general optimism of households. The fast spread of the real estate crisis, with sales of new housing plummeting by 40% since the beginning of the year, seems less and less to be under government control, and has contributed to the drop of almost 50% in the MSCI China index over the past 12 months. This has increased the feeling of impoverishment in the population, against a backcloth of inflation in energy and food prices as a result of effect of the war in Ukraine on a country that is still largely a net importer of resources.
A massive amount of state intervention will be needed if its objectives are to be reached.
One may well be surprised that the government has risked setting its growth target for GNP in 2022 at the high level of 5.5%. In order to achieve this, not only will the government have to use further classic measures of support for the economy — lower interest rates, lower taxes, increased credit, more investment in infrastructures — but, more importantly, it will also require the return of confidence to the private sector on behalf of both companies and individuals. In particular, this implies a much higher level of state intervention in the real estate sector — whose characteristics cannot help but remind one of the subprime crisis in the USA in 2007 — as well as the end of the all-encompassing regulatory attack on digitized services.
These problems must not obscure Chinese industry’s upmarket move in technology in key sectors for the future: e.g. renewable energy, the electric car and the automatization of production. However, these sectors only account for 30% of GNP and cannot be the sole guarantors of the “common prosperity” promised in 2021. If we are to see this term raise its head once again in official speeches, it will require a U-turn — and this is something that those who have been observing China for some time are now used to.