What if the growth rate of China was half that of the US in the next decade?
This column was previously published in l’Opinion on 26th march 2024
With its economic policy currently up against a brick wall, Beijing is having to face up to reality. Could this mean the end of China’s dream of becoming the leading world power by 2049?
There is no better indicator of a country’s growth potential than the yield from its 10-year Treasury Bonds. As the annual combined session of the People’s National Assembly and the Chinese People’s Political Consultative Conference comes to an end, the Chinese Treasury Bond has slumped to a mere 2.3% yield compared to 4% in the pre-Covid period. At the same time, the American T-Bill yield has risen to its historically average rate of 4.5%. Over the next decade, financial markets anticipate that US growth will be twice that of China — the very opposite of the “catch-up” promised in Beijing’s propaganda.
The postponement sine die of the “Third Plenum” — the traditional meeting on the economy that marks every new mandate and which should have been held last October — reveals the blind alley in which the government finds itself with regard to rebuilding a growth model after the real estate crises imploded.
The official — and unrealistic — objective of 5% growth in 2024 has undoubtedly reinforced the loss of confidence in the government, on the part of private entrepreneurs, who are facing deflation of -1% to -2% on average, and of local civil servants, who, very often, are now only receiving part of their previous remuneration.
The most interesting observation to be made from what has emerged from the week’s debates in the “‘two Assemblies” is that the central government is taking on an increased share of the “extended” budget deficit — estimated at 7% to 8% of GDP, approaching the American level. Regional finances have been brought to ruin by the real estate crisis and are no longer able to bear incremental deficits.
By the unprecedented cancelling of his traditional press conference during the “Two Assemblies”, Prime Minister Li Qiang has openly recognised that current economic policy is in an impasse.
Two positive signs
Two new positive signs have emerged from this, showing how even the “neo-Marxist-Leninists” are finally facing up to reality. The first is in the announcement that there will be an end to work on infrastructures with insufficient returns in far-flung provinces such as Yunnan and Guangxi. The second is that, with government support now limited to “leading national companies”, there is a marked slowdown in imports of materials for semi-conductor manufacturing. Second only to electric cars, the semi-conductor sector has seen a mismanagement of public funds that must be put an end to if China wants to save its economy.
If this development were to be confirmed, it would be excellent news for the rest of the world: although China’s growth would be more modest, it would be of a better quality and its lethal deflation would no longer be exported. The main obstacle to this happening remains the existential challenge it poses for the Communist Party: halving China’s potential growth in the second half of the present decade is in direct contradiction with the “Chinese dream” and its promise that China would be the leading world power by 2049.
By the unprecedented cancelling of his traditional press conference during the “Two Assemblies”, Prime Minister Li Qiang has openly recognised that current economic policy is in an impasse.” China still loves paradoxes, and we will see in the next few months whether this move is indeed a sign of the much-needed U-turn in policy which, since the 20th Party Congress, has brought private investment to a standstill. If not, then Uncle Sam will be delighted to find its own economic hegemony being strengthened as planned.
