China: structural deflation heralds increased systemic rivalry with Europe
This column has previously been published in L’Opinion on January 29th 2024.
Economic growth is having to face up to strong obstacles, and structural deflation in China is bound to increase antagonism with the European Union.
With the new Year of the Dragon comes the “Japanization” of the Chinese economy, which has come about sooner than expected. The Chinese people’s proverbial zeal for work could be held back by three obstacles.
First of all, domestic demand is weakening given the “negative wealth” effect linked to the collapse of the real estate market and the stock exchange, penalizing 200 million retail savers. Secondly, at this early moment in the year, there is a widespread and unprecedented fall in salaries in absolute terms. Thirdly, investment — whose increase is purely state-driven — is creating even more excess capacity in the so-called “industries of the future”, as illustrated by the price war in the electric vehicle market. You don’t need to be clairvoyant to forecast a similar scenario in the lagging-edge semi-conductor sector, where the national leader SMIC has just confirmed an investment figure of $7.5 billion in 2024, i.e. 100% of its turnover, justifying this as “a long-term measure independent of the economic cycle”.
The desire — typical of a war economy — to control production on a global scale in key sectors should strengthen the deflationary thrust in China. This will be worsened by the monetary policy being carried out by the PBOC (China’s central bank) and which is still highly restrictive. The maintenance of extremely high real interest rates of between 3% and 4% isn’t working either, especially when compared with the real rates in the West which are neutral, or even negative. There are two reasons for this paradox. Firstly, the need to artificially protect the parity of the RMB, which is already under pressure versus the dollar. Secondly — and far more dangerously — any fall in interest rates reduces the profits of banks and insurance companies — which are all controlled by the Communist Party — and enables private entrepreneurs to borrow cheaply… A value transfer that hardly meets with favor from Beijing.
For the first time, economic growth and the interests of the Communist Party have diverged. This marks the end of the famous Public-Private Partnership, which was the source of the “Chinese miracle” that spanned several decades before 2022.
The break. This is the point on which there has been a break with the Chinese development model of the last 40 years. For the first time, economic growth and the interests of the Communist Party have diverged, marking the end of the famous Public-Private Partnership, which was the source of the “Chinese miracle” that spanned several decades before 2022.
This is why, more than ever, Beijing has its eyes on the European decarbonization market. The prospect of further increasing its trade surplus — already at $400 billion — is less about a desire to make immediate profits than compensating for the loss of the 30 points of GNP traditionally associated with real estate.
Against this background, there are questions surrounding the opening of an enquiry initiated by the European Commission into the Chinese railway giant CRCC. Having put in a tender for the supply of 20 electric trains for Bulgaria at a price that was 50% below the best European tender, the world leader of the sector is suspected of having received grants enabling it to skew the European market. Did Brussels really need several months to rule on this instance of unfair competition? Let us hope that it will soon realize that structural deflation is making the dragon — a highly likeable animal in China — into a dangerous systemic rival to Europe.
