The Chinese New Year — a New Tiger in the Tank?
Rather than prioritizing strong growth, the Chinese government is giving priority to a new financial rigor. A new hand for Europe to play against.
This column (“Lettre d’Asie”) was previously published on 17th february 2022 in L’Opinion
With this Chinese New Year under the sign of the tiger, will China manage to get back to a growth situation after the significant slowdown at the end of 2021? Going by January’s statistics, this doesn’t look at all certain. For example, Bloomberg notes a 40% fall in new sales by the main private real estate developers. The “common prosperity” promised by the government will have to come from other sources: the wealth effect linked to the over-valuation of real estate is now a thing of the past. As for domestic consumption, it is bound to continue to disappoint, even if a short-term recovery is expected as from the second quarter because of hopes of a relative relaxation of health constraints.
In the short term, therefore, it is more by pursuing public investment in infrastructures that the situation will be saved. Investment in roads and trains that took place in the 2010s must give way to investment in the digital world, particularly 5G and the cloud, and in the environment, notably investment in solar energy, which should sharply increase this year after a slowdown in 2021.
Added to this should be corporate capex, with loans being granted again, after been badly penalized last year by the country’s unprecedented deleveraging of almost 10 GDP points. The PBOC (the Chinese central bank) should in fact continue to relax regulations concerning the reserve ratio of the banking system so as to make it easier for companies to recover their Capex.
The “common prosperity” promised by the government will have to come from other sources: the wealth effect linked to the over-valuation of real estate is now a thing of the past
Contagion. Lastly, exports, the main driving force behind growth in 2021, will continue to outperform the rest of the economy, being led this year less by Western governments’ support of consumption than by the recovery of industrial investment in the West, after two years of under-investment. This will be of considerable benefit to China, whose exports consist more of intermediate goods than consumer goods.
The American and Chinese economies are therefore bound to disconnect. In the USA, there is a growing risk of inflation due to a boom in demand maintained by a generally excessive post-crisis stimulus plan, which leaves the Fed in a dead-end street, it being impossible to raise interest rates without triggering a stock market crash while, on the other hand, being obliged to raise them to avoid a fall in purchasing power for households and an ensuing social crisis. The opposite is true in China where they are fighting the risk of a serious economic slowdown linked to the real estate crisis, which even a highly managed economy is finding out can spread over the whole country.
The novelty of this situation comes from the meager government support given to the economy. Rather than prioritizing strong growth, the Chinese government is giving priority to a new financial rigor, having stabilized its global debt since 2017 to around 270% of GDP, whilst the USA and Southern Europe added 25 leverage points over the last two years.
So the tiger of 2022 could well deal itself a new hand for Europe to play against: a slower Chinese growth rate — presently only 5% — which is foreseen to decline into only in line with the rest of the world by the end of the 2020s; but also greater financial rigor. Budgetary policy is destined to strengthen the credibility of the RMB, the Chinese currency, which few European decision-makers seem to have realized has already appreciated by 30% in relation to the Euro over the last ten years.