As China’s economic and financial impasse deepens, the question is whether the rest of the world can become organised in time.
This is the 88th article in the series The China Chronicles.
Read the articles here.
The People’s Republic of China is facing a slowdown unprecedented in recent memory. According to a Reuters poll of economists, the consensus is that growth will slow to a three-decade low in 2019 — and perhaps dip even further in 2020, below six per cent for the first time since the “China miracle” took hold in the 1980s. This would follow some years of growth that were lacklustre by the PRC’s standards — 6.8 per cent in 2017, then 6.6 per cent in 2018. Whatever general doubts about the quality of Beijing’s data, the trend is unmistakable. Global growth faces headwinds; a stop-start trade war has dragged down export demand; and domestic demand has weakened steadily in spite of an aggressive combination of fiscal and monetary policy. Demand weakness is reflected in wholesale prices. In September 2019, Chinese factories faced price deflation of 1.2 per cent on an annualised basis (although consumer prices rose, driven by food inflation, particularly in pork). Meanwhile, the central government has already deployed its tried-and-true method of pushing up growth, more than doubling fixed investment in the first three months of 2019 — as well as cutting taxes by about $300 billion. It also tried to push about $100 billion extra revenue through to debt-ridden local governments.
For the government, a major question will have to be how it can manage the inevitable fallout of this prolonged slowdown on factory wages, which have always been one of its primary concerns. The National Development and Reform Commission has admitted that the trade war and the slowdown has slowed recruitment and that the government felt “pressure to maintain stable employment”. Donald Trump has claimed in political rallies that China has lost “three million jobs”, but the fact is that, for once, the US president might be under-stating it — the China International Capital Corporation in July 2019 estimated job losses at five million. Export-oriented provinces like Guangdong may be hit particularly hard — the federal government has cracked down on the release of data from there. Most worryingly, a Nikkei survey of 37 manufacturing sector businesses in Jiangsu and Shanghai revealed that in 30, wages were stagnant, and in two, they had declined. Given that wages are often accepted to be the most politically sensitive target for Beijing’ policy makers, if they do not face a full-blown crisis then they are certainly in deep trouble.
There are two broad sets of implications for this domestic economic impasse facing Beijing’s leadership needing attention from the international community.
First, there will be strong domestic incentives for sustaining and perhaps upscaling the robustly nationalist approach to international relations that has been the hallmark of Xi Jinping’s tenure. The economic pressure for a trade compromise with Donald Trump’s America has always been strong, and may get stronger. Yet the political pressure within the Party system to appear resolute has already been shown to be of a far greater order. It is worth remembering that, by all accounts, the top CCP leadership tore up a trade compromise painstakingly hammered out by Xi’s preferred negotiator, Liu He, in May 2019, pushing bilateral relations further into a negative spiral.
What if wage-setting export-intensive sectors are hurting so badly that some form of trade compromise can in fact be reached in which Beijing gives away more than it currently feels it can? This does not mean that confrontation with the US or neighbourhood powers will be any less intense. In fact, incentives would lie in the opposite direction; there will be a heightened need for the leadership to appear to be strongly defending Chinese political interests if economic interests have been “damaged” by any supposedly unfavourable compromise.
The imponderable here is the nature of domestic Chinese public opinion. Naturally, this can be shaped by Beijing through its control over the Great Firewall. On some recent occasions the authorities seem to have felt it to be in their interest to minimise the domestic reaction to international news that might reflect adversely on China’s global position, and have relatively successfully controlled the flow of related information. Thus, we are left with two realities: when Beijing wants its netizens incensed, and when it finds itself unable to control information.
Examples of the former are in fact easy to observe now. The ability to portray Chinese online public opinion as representing the unfiltered and unified view of Chinese consumers and unleash it on multinational companies is an unexpectedly powerful weapon in Beijing’s arsenal. So far, it has usually provided easy wins for domestic public opinion, reinforcing the impression that China is not to be trifled with; and it has further intimidated consumer-facing multinational companies, whose reliance on the Chinese market, thus exposed, will also serve as a useful reminder to global trade warriors about the perils of being excluded from China.
Yet the dangers of this strategy appear to have been unforeseen by all concerned. When it moves from the purely commercial to the cultural realm, then it has the potential to radicalise otherwise quiescent Western public opinion. This is the unquestionable result of the recent controversy involving the Houston Rockets and the National Basketball Association’s (NBA) apparent kowtowing to China. Similar controversies have also arisen in France’s Ligue 1, for example, where Olympique Lyon fans incensed at a match time change meant for Chinese TV broadcasts created a very impressive Tibetan flag in the stands. The possibilities in such cases for escalations in nationalist chest thumping are obvious.
The other occasion on which this imponderable comes into play is when there is simply too much information available for Beijing to choke off the flow. The ongoing pro-democracy protests in Hong Kong, for example, cannot be censored completely — but fortunately; the official spin that protestors are simply anarchic troublemakers has taken hold behind the Great Firewall. Nationalist reaction has been at best contemptuous of the protests. The question is, if and when the anti-mainland and even secessionist components of the protests become dominant in the narrative, whether Beijing will be able to control or shape mainland public opinion, as it would wish, or whether an incensed mainland public sphere will narrow their options.
Thus, an economically weakened Party leadership might well be forced into a series of escalating political confrontations. It is far from clear how its counterparts in capitals in New Delhi, Tokyo and Washington can and should prepare for this dynamic.
The second effect to be prepared for is the impact of an economically less secure China on its overseas economic engagement. Beijing, as befits a country that runs a massive current account surplus, is also a major overseas investor. In macro-economic terms, this means simply that Chinese workers produce more than they consume, thus building up savings; and part of what they save is (and has to be) sent abroad.
Yet in any globalised country that appears to be facing hard economic times, there is a good chance that xenophobic economic sentiment will take hold. In the United States and many other Western economies, this has taken the form of anti-trade views becoming a significant pole of democratic politics. In the People’s Republic, anti-trade sentiment would be meaningless given the large gains from trade that it has made. But domestic resistance to outward capital flows may well increase. Of course, if and when the current account surplus comes down, the capital account deficit — how much capital is being sent abroad — will also come down. However, the form that the domestic political narrative surrounding capital flows takes is of importance. The Party will not complain about anger about the newly rich pushing money out of the country in defiance of capital controls. Such public anger gives them an additional lever of control over the private sector, and in keeping with recent Party priorities.
However, it is also clear that one form this backlash is taking is objections to unremunerative infrastructure investment abroad. In other words, the more unsustainable components of the BRI are very vulnerable to criticism going forward. This is of course already visible and has been commented upon. An understanding of this reaction to the BRI is widely considered one of the reasons that the last BRI summit was noticeably less grandiose, and that there has been greater care about the apparent (if not always real) financial viability of BRI projects. It is to be noted that both the ceremony surrounding the BRI Forum and the much-publicised size of the BRI lending overall has in fact already been deployed as part of dissident political rhetoric. The Tsinghua University professor Xu Zhangrun, in a widely read manifesto last year, characterised concessional BRI lending as “aid”: “Over-investment in international aid may well result in deprivations at home. It is said that China is now the world’s largest source of international aid; its cash-splashes are counted in billions or tens of billions of dollars. For a developing country with a large population many of whom still live in a pre-modern economy, such behaviour is outrageously disproportionate. Such policies are born of a ‘Vanity Politics’; they reflect the flashy showmanship of the boastful and they are odious.”
While political pressure on the BRI is an almost inevitable consequence of increasing economic weakness, there are — as with the nationalist imperative — a crucial imponderable as to how it will play out in practice. Will greater attention to viability mean that the BRI is scaled back in toto? What would the effect of such a downsizing, tacit or announced, be on China’s stature in contested geographies such as Eastern Europe or sub-Saharan Africa? What, also, will it mean for Xi’s own image, given the president’s close identification with his signature project?
Or would a concern for viability instead mean that the downscale is less than required but that, over time, contests between Chinese capital and global borrowers about returns become more intense? While this would protect Xi’s image in the medium run, it might in fact be more harmful for Beijing’s strategic interests over the long term.
In both the above sets of implications, it is clear that the Beijing leadership has some recalibration to do — and its counterparts globally have some thinking to do. The one big advantage that Beijing continues to have is that such thinking from its rivals is sporadic, their planning atomised, and their reaction uncoordinated if not actively chaotic and self-defeating. As China’s impasse deepens, the question is whether the rest of the world can become organised in time.
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Mihir Swarup Sharma is the Director Centre for Economy and Growth Programme at the Observer Research Foundation. He was trained as an economist and political scientist ...
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