The Chinese tiger growls ever so softly

By Chelton Wealth, January 21

The year of the tiger

The Year of the Tiger will start in China at the beginning of next month. The tiger is brave and aware of its strength. However, it is doubtful whether these qualities are currently an accurate reflection of the state of the Chinese economy. While there are two major events coming up this year – the Winter Olympics in Beijing and the Communist Party’s 20th Party Congress – the economic model is beginning to show signs of faltering. This week, the country announced historically low growth figures.

Poor growth

Last year’s growth was enviably high at 8.1%, exports grew by a third compared to 2020 and the trade surplus reached a new record of 676 billion dollars. At first glance, these seem like good figures, but the reality is less rosy. This growth was mainly due to the record growth in the first quarter. Afterwards, it started to slow down. In the third quarter, the economy grew by only 4.9%, and in the fourth quarter that has just ended, growth remained at an unprecedentedly moderate 4% for China.

Shared prosperity

There are several reasons for this. President Xi has announced his intention to combat inequality in society and to focus more on shared prosperity. In the summer, a major clean-up operation was started. Large technology companies were restricted by stricter regulation and fined billions for monopolies or data privacy violations. Well-known technology funds such as Alibaba and Tencent saw their share prices plummet.

Real estate crisis

In addition, China is struggling with a huge property crisis. The collapse of the country’s largest real estate concern, Evergrande, was partly caused by the central government. They no longer allowed financing with irresponsibly high debts. Meanwhile, more and more real estate companies are being dragged into this crisis and local governments are being forced to complete projects for which real estate companies lack the money. Land sales have collapsed, even though local authorities were so dependent on them. And the real estate sector accounts for about 20% of China’s GDP.

The virus knows no bounds

Then there is the coronavirus. The authorities seem unable to get it under control. Almost 90% of the population has been vaccinated, but Chinese vaccines do not protect against Omikron as well. That is why the government intervenes, with all the economic damage this entails. For example, the port city of Tianjin – with 14 million inhabitants – is completely cut off from the outside world. Flights and high-speed trains have been cancelled and no cars, buses or taxis are allowed to leave the city. Bear in mind that the city has only known 126 corona cases. Just think of all those container ships docked in this port with products destined for the rest of the world.

Demographic problem

In addition, the shift from an export-driven to a consumption-driven economic model does not seem to be going smoothly. While the growth of retail sales lags behind expectations, exports are rising explosively. See the record surplus on the trade balance mentioned earlier. And then there is the ageing population. Although China has abandoned its longstanding one-child policy and switched to large-scale birth control, the number of young people is growing only moderately. In 2020, 18 per cent fewer children were born than in the previous year. Meanwhile, the birth rate has reached a record low.

Less growth

Based on the above facts, economists are lowering their growth forecasts for China. Goldman Sachs, for example, expects a growth of only 4.3 per cent this year. By Chinese standards, this is very meagre. A declining growth will undoubtedly have consequences for the world economy. After all, for decades, China was the main driving force behind global growth and low inflation. President Xi wants to secure another term at the Party Congress later this year. To do so, he needs stability in the country. And for the time being, that takes precedence over economic growth and innovation. State-owned companies are just as important as private technology companies. The tiger will growl a little less. The world economy will notice.