China: from Denial to Acknowledgment.
This column was previously published in l’Opinion on October 11th, 2024
Signs of a deterioration in the Chinese economy, as well as measures being taken by the government, are confirmation that taking the country into a war economy is proving costly.
Recent events show that Chinese policy has changed, and confirm that there has been a serious deterioration in the economy since the turning point of the 20th Party Congress in October 2022. Hong Kong is playing the canary in the coal mine: HSBC said it was calling 10% of its commercial mortgage loans in Hong Kong “problematic”, inferring underlying asset values down by 30–40%. Another sign is that one of the ten local tycoons, Henry Cheng, aged 77, removed his 44-year-old jet-setting son Adrian from the post of President of the family real estate business, New World, after its market capitalization collapsed by an unheard-of 85% over two years. What’s more, Beijing announced a plan to bolster the economy on a scale that has not been seen since the 2008 Global Financial Crisis: injecting the banks with massive amounts of liquidity, speeding up support for real estate and SOEs, massive stock exchange purchases by state institutions… Over three days, the mention of amounts potentially up to a total of over $500 billion, while implying that the Chinese Central Bank (the PBOC) retains the option of intervening even further.
The stock exchange acclaimed this breath of fresh air and showed a near 15% rise in a week, partly compensating for the near -40% dive that it had taken over the previous three years. But this turnaround, which could be prolonged in the short term, cannot indefinitely conceal the main issue: that, in basing Chinese growth on subsidized exports, the change to a war economy is turning out to be extremely costly to Beijing. This is particularly true of so-called “strategic” industries: the Chinese Association of car dealers announced losses of $20 billion to its members, groaning under the weight of unsold stocks; while the 138 companies involved in the solar panel value chain saw their profits plummet by 86% in the first half of 2024!
China’s joining the WTO in 2001, and now its swing to a war economy since 2022, mean changes to global economic interdependency.
The second shock. This amounts to an open acknowledgment by Beijing that China’s growth is artificial, just as the official growth rate of 6% announced in 2008 was “corrected” to merely 2% ten years later. Today, a distortion of the same magnitude would imply that the Chinese economy is simply stable in value terms. The speed of deflation is wiping out volume growth — which justifies the massive government support that has just been announced.
Whether the stock exchange optimism lasts or not will depend on the way this “helicopter money” is used. At this stage, it seems geared for the most part to strengthening the Party’s hold over the economy. This government control will be enforced through bailouts of cash-strapped local councils and state developers, or by speeding up the nationalisation of the stock exchange — cleverly done at its lowest point! — as opposed to reviving consumption, which is still sluggish, not least because of the unprecedented drop in salaries in 2024.
European companies therefore have to ask themselves the question whether this turning point, more than just an admission of a short-term economic imbalance, is, in fact confirmation of government financing of the “second China shock” in line with the third plenary session held in July. Similar to China’s joining the WTO in 2001, its swing now to a war economy since 2022 heralds changes to global economic interdependency.
