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Economics

Don’t Write Off China’s Economic Recovery

Jul 6, 2023 Zhang Jun

While China's post-pandemic economic recovery has so far lagged well behind expectations, a supportive policy package can go a long way toward changing that. Even economic headwinds rooted in external geopolitical conditions can be overcome in the medium to long term.

SHANGHAI – The strong growth rebound that was widely expected to follow the end of China’s zero-COVID policy has yet to materialize. This is both less surprising and easier to understand than many observers seem to think.

The end of COVID-19 lockdowns was supposed to unleash a powerful wave of pent-up demand. Instead, aggregate demand, which had been slowing before the pandemic, has returned to its previous trajectory. Though Chinese have been traveling, socializing, and dining out more, consumer-spending growth by households has been limited. Fixed-asset investment has not recovered.

With a few exceptions, such as the new-energy-vehicle (NEV) sector, economic activity has remained subdued. As a result, growth has been much weaker than expected. Though real GDP growth reached 4.5% in the first quarter, it is expected to slow in the second. Core inflation is hovering around zero, and the producer price index is in negative territory.

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vic lai Jul 7, 2023

China's current accumulating economic problems can (also) be explained from the point of view of the major economic policies enacted by the Beijing leaders in the last 3 decades.
---
(A) During the reign of Jiang Zemin/Zhu Rongji (March 1993 --- March 2003).
Since the "Household Contract Responsibility System" had released 70% of the labor force in the rural villages, the country's exports assembly industries were supported by a massive amount of cheap labor.
So during that period the country's GDP was mainly pulled upwards by her external trade.
At one time, the external trade as a proportion of her GDP reached as high as 60% ------ China became the world's factory.
The massive migration of rural workers to the exports assembly sector meant that the income of the rural population kept on rising very quickly, which in turn had greatly stimulated the country's domestic expenditures.
The country was gradually transformed from a rural country into an industrialized one.
Her industrialization stimulated the domestic property market, which in turn increased the internal demand for her industrialised products, forming a virtuous circle.
Her GDP kept on growing quickly at the double-digit rates --- the growth was so fast that by 2003 the new Beijing leaders, Hu and Wen, had to propose lowering the country's growth rates.
Which means, before Hu and Wen, the massive migration of rural workers to the cities had propped up the country's consumption demand, accelerated her urbanization strive, and raised her economy's total factor productivity.
Her urbanization strive in turn had bid up the property prices, sustaining the prosperity of the property sector and increasing the domestic industrial demand, thereby forming a virtuous circle.
---
Here we can roughly see the fact that China's economic growth or prosperity in the past decades ultimately came mostly from her prospering external trade, or from the help of the wealthier foreign consumers, which mainly comprised of 500 million or so richer and stable middle-class residents in the US, the EU countries, Japan and other richer Asian countries.
China's economic growth model was nothing new and special ------ it'd been the same as the traditional Asian growth model which had proven successful in quickly developing the past economies of Japan and the four little dragons in Asia.
---
- vic lai Jul 7, 2023
  
  (B) During the reign of Hu Jintao/Wen Jiabao (March 2003 --- March 2013).
  The ideas of those two new top leaders might have been different from each other, but the net result was the same ------ striking a blow against the virtuous cycle of the country's economic development mentioned upstairs.
  ---
  The "Theory of Scientific Outlook on Development" was quickly put forward by Hu in 2003, the year when he took up the reins of government.
  He actually meant that the past policies of the previous leaders were not scientific enough.
  Instead, the incumbent leaders greatly promoted the concept of "New Village," trying to tie the villagers to their rural villages and discouraging them from entering the country's cities.
  Shortly after becoming the new Premier, Wen practised yuan revaluation, repealed the exports tax rebates, and massively increased the cost of employing the workers (by enforcing both the minimum wage standard and the compulsory pension fund schemes).
  This caused the country's exports assembly industries to almost crash overnight.
  Many factory owners suddenly disappeared.
  The economy's external trade as a share of GDP dropped like a stone, reaching the current level of less than 20%.
  Even worse, raising the flag of lowering the country's property prices, the leaders started to subdue the domestic property market.
  As a result, the country's urbanization strive, external trade exports, and the property market were all hurt.
  The chain of the country's original virtuous circle of quick economic growth was therefore broken.
  The economic growth rates started to fall, entering a new vicious circle.
  ---
  The economic train could only move on slowly even after the 4-trillion-yuan investment binge had been enacted following the Global Financial Crisis of 2008.
  In short, the 4th-generation leaders used "village-nization" to hamper urbanization on the one hand, and suppressed the property prices to impede the property market on the other.
  They also used yuan appreciation, cancellation of exports tax rebates, and propping up of labour costs to hamper the domestic industries.
  How could the domestic economy have avoided the secular trend of steam-losing downward-moving in that decade?
  ---
  - vic lai Jul 7, 2023
    
    (C) During the reign of Xi Jinping/Li Keqiang in the past decade (March 2013 --- March 2023).
    They proposed a group of policies shortly after they became the new leaders, which included the urbanization strive in particular.
    They also gradually relaxed the restrictions placed on the domestic property market.
    But the beneficial effects were not obvious. Why ?
    ---
    Their ideas of urbanization were more advanced than that of "New Village" of the former leaders, but they were still concepts of a planned economy.
    While the "New Village" concept tried to limit the village population to the villages, the newly proposed "urbanization" of Xi and Li was actually "provincialization" ------ limiting the urbanizing rural population to the nearby small and middle provinces.
    Both concepts share one thing in common: both of them had neglected the genuine wishes of the villagers, since they were typical anachronistic planned-economy thinking.
    But most villagers thought that, so far as the provision of employment, education, hospitals, retirement benefits, commerce, and high-end services is concerned, the big cities always beat the small provinces.
    ---
    Most if not all of the rural villagers simply did not want to settle permanently in the nearby small provinces, because the key consideration was that there could never be enough job opportunities in the small towns.
    For one thing, without the help of the central government, can the local governments in the small provinces provide enough subsidized houses, good schools and hospitals for them to live in ?
    Since many villagers were not willing to move to the small provinces, their urbanization strive in the past decade had mostly lost its economic practicability, and so the country's not-yet-complete "genuine urbanization" had not succeeded in further pulling the domestic economic train quickly forward.
    ---
    - vic lai Jul 7, 2023
      
      Note that in the past years, some local governments in China's remote provinces simply reclassified some of their provincial towns as urban cities so as to satisfy the central government's urbanization quotas, but those "cities" were by no means genuine economic cities in the true sense of the word.
      ---
      "Genuine urbanization" should be the only way out for the present steam-losing Chinese economy.
      Which means, the country's hukou and rural-land reforms have to be genuinely accelerated as well.
      Humans are social animals, they naturally like to live together and interact with each other.
      According to a slogan of Shanghai's World Expo, "only city life can make your living much better."
      Provincialization alone is not enough, and is not fair to the village dwellers.
      Like the "New Village," it's against human nature and is therefore a dead end.
      Only genuine urbanization, not "New Village" nor provincialization, can allow the market to work its magic, through the help of division of labour and agglomeration economies.
      ---
      To see the point we only need to consider the potential land-sale revenues that can be obtained by the local governments.
      In Shanghai, a mu of land there can sell for several tens of millions of yuan, but in a small province, it's only several tens of thousands of yuan.
      Without suitable land-sale revenues, how can the local governments have enough monies to develop the towns ?
      Who is going to build the subsidized houses sorely needed by the settled villagers ?
      Even though China's current few hundred cities is not big enough to fully accommodate the potential incoming rural families, big city groups and megacities have to be seriously planned and truly established before the domestic property market can be re-vitalized and the country's internal demand can be significantly re-propped up.
      China's sheer size means that, unlike Japan and the four little dragons before her, China can no longer rely mostly on enough external demand to pull herself out of the potential Middle Income Trap.
      And only in this way can the Chinese economy say goodbye to the current downward-moving trend.
      ---
      It goes without saying that the current Beijing leaders can hardly rely on the country's virtual economy (the artificially propped-up stock market or her financial sector) to sustain her high economic growth rates in the foreseeable future ------ only the real economy can give a big country the real salvation.
      In short, what really matters economically to China now is genuine urbanization, not her stock market, nor interest rate liberalization, nor exchange rate liberalization, nor opening up of the rest of her financial accounts, nor yuan internationalization.
      ---
      The increasing income and wealth disparity between the urban dwellers and the rural villagers, together with the worsening unemployment problems of many young people in the "urban" cities, are a potential time bomb waiting to explode in China one day in the future.
      This danger must be fully eliminated by the current Beijing leaders if they want their next-generation princelings to safely inherit their "empire."
      Afterall, most highly-guarded castles can only be crumbled from inside, not from outside.
      Also, without narrowing the widening gap between the rich and the rest, China will have a smaller chance of circumventing the Middle IncomeTrap in the future.
      ---
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