China’s economic prospects have attracted even more international attention after the U.S. election. The Chinese Communist Party (CCP) has vigorously promoted the idea that China’s economy is the only one in the world and will become the world’s largest economy within a few years. The international media have their own opinions on China’s economic analysis, both positive and negative. The uncertainty about the future of U.S.-China relations has made it even more difficult to understand China’s economic prospects.
For Hong Kong people, this confusing assessment of China’s economic prospects may be a bit of a tangle. Hong Kong’s economy has long been deeply integrated with China’s, and if China’s economy improves, so does Hong Kong’s economy; but a booming Chinese economy will boost the confidence of the Chinese Communist Party (CCP), and if the West takes a greater interest in China’s economy, there will be less international resistance to the CCP’s political continentalization in Hong Kong.
To grasp the reality of China’s economy, three challenges must be overcome: the information is not credible, the Epidemic is not predictable, and the foundation is not reliable. There are doubts about the official data on economic growth; there is no way to tell how far the epidemic will spread if it resumes; and the foundations of China’s economy – consumption, exports and investment – have all entered a bottleneck and the outlook is uncertain.
The “troika” has all entered a bottleneck
An article published in the Wall Street Journal on January 14 argued that China’s economy will be the best in the world, mainly based on official GDP data released by the Chinese Communist Party. On January 11, Yu Yongding, a member of the Chinese Academy of Social Sciences and former member of the central bank’s Monetary Policy Committee, gave an internal speech titled “I don’t believe any calculation of China’s potential economic growth rate”. He mentioned that the consumption growth rate dropped six percentage points in the first ten months of last year, and that the economy grew mainly by real estate investment; the low economic growth caused high unemployment and a deteriorating fiscal situation. What he did not say is that the fiscal investment forced by the authorities to boost the economy last year amounted to 3.6 trillion to 5.8 trillion yuan, accounting for about 3-5% of GDP, and as a result, most of the money went into real estate, which was used by local governments and real estate companies to pay off old debts, and finally brought only 2.6 percentage points of growth to GDP.
The Perception that China’s economy is improving is based on the fact that China is the first country in the world to emerge from the epidemic and will therefore lead the world in economic recovery. No sooner had that been said than the epidemic resumed in many parts of China, with Beijing and other major cities locking down parts of their neighborhoods. It is difficult to tell how far the epidemic will spread this year based only on the Communist Party’s official media.
The “three horses” that drive China’s economy – exports, consumption and investment – are all almost down. China relies heavily on the U.S. market for its exports in exchange for foreign currency. The Chinese Communist Party had hoped that the U.S. would soon remove tariffs on China after Trump‘s ouster, making it easier for its exports to the U.S. to reach new heights. But the Biden administration is facing a lot of backlash against its new domestic policies and does not seem to have any plans to revoke tariffs on China in the near future, so Beijing has cancelled plans for senior officials to visit the U.S. and will have to wait patiently to see what the future outcome will be, not necessarily to give the CCP what it wants. The CCP also has an unexpected problem of export chain disruption. Some foreign and Chinese companies have been withdrawing from China to avoid U.S. tariffs and to diversify their supply chains, leaving many of China’s export chains without key components. The Chinese Communist Party has announced that it will invest heavily in repairing the chain, taking a decade to achieve “import substitution” of shortage parts. The effect of this move may not be optimistic, because the goods produced after the transfer of foreign companies have filled the international market.
Last year was a turning point in the history of the Chinese Communist Party’s policy of using the real estate sector to drive the economy, and this policy has come to an end. The Communist Party fears a potential financial crisis as the blind expansion of real estate has caused a rise in bad bank loans. At the end of last year, the CCP changed its policy, not only discontinuing the failed policy of boosting the real estate industry with fiscal investment, but also setting a red line for banks to tighten real estate loans. The real estate industry has crossed the peak of its glory and started to go downhill, with housing prices falling in many places; and a possible property tax due to fiscal constraints could further push the housing market down.
China’s high housing prices and high unemployment have curbed spending power, and the recent sharp rise in Food prices has shrunk the population’s desire to buy non-essential goods. Once the property tax is introduced, the trend will be for low consumption in China going forward, and it will no longer be able to boost the economy.
China’s economy is not optimistic, and even Beijing’s foreign propaganda website, Dovetail News, says that it faces huge internal pressure in 2021 and that “the era of pretty economic figures as ‘governmental virtuous governance’ is indeed over”. But it will be some Time before a thorough consensus on this point can be seen in the international media.
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