Possible slowdown in China's race for global leadership as domestic problems are resolved

Opinion

China's economic outlook for the medium term seems to be rapidly dimming. Suddenly, talk of American declinism is replaced by talk of Chinese declinism. From 2000 to 2019, China's economy grew at an average annual rate of about 9%. Since then, it has grown twice as slow and very unstable. In a world struggling with inflation, China's latest CPI reading is -0.3%, reflecting a deflationary slowdown. The possibility of exceeding 5% growth in the medium term seems to be diminishing for a number of cyclical and structural reasons.

When China's economy boomed in 2019

China's government has embarked on a series of measures that can be summarized as increasing the role of the state, suppressing market forces, and reducing corruption and opportunities for unjust enrichment. The main political-economic objective was to eliminate alternative power structures in China and consolidate military, administrative, and economic power in Xi Jinping's authority. Repositioning the economy from private sector-led growth to a state-led model now seems to have proven to be a hasty mistake. China also seems to have overplayed its hand with an anti-terrorism law that has prosecuted foreign companies and businessmen for activities that are normal in most countries. This has made finding employees willing to relocate to China very difficult. The worrying factor for China is that this has already led to a decline in foreign direct investment (FDI).

China's complete lockdown during the pandemic

and its delayed and abrupt opening has undermined its economy. The real estate market is suffering from falling prices, insolvency of companies, accumulation of unsold inventory and subdued demand. New home prices have fallen 20 of the last 24 months compared to the previous month. Evergrande, a real estate giant with 1,300 projects in 280 cities, has a debt load of more than $300 billion. Its stock price dropped 99% and it defaulted on some of its foreign debt. Evergrande is not alone in its problems, but is fully reflective of the entire over-indebted industry.

China's decade-long project to diversify

its economy toward domestic consumption has failed. While consumer confidence seems to be gradually reviving, it remains below 2019 levels. Excessive household savings that used to be channeled into real estate have not switched to consumption, which may be due to the negative "wealth effect" from falling real estate values.

From a long-term perspective

demographic decline in China is reaching alarming proportions, a disastrous consequence of the decades-long one-child policy.

Youth unemployment is so high that Beijing refuses to publish figures. The high unemployment rate during the country's peak population suggests that growth projections may be exaggerated. There is also a serious crisis of confidence among private companies and consumers. The Chinese yuan hit its lowest level since the Global Financial Crisis at 7.3 yuan per dollar. Some experts say that if the yuan were a free-floating currency with the possibility of free capital flows, it would fall even more.

Though

It may be premature to proclaim a permanent and meaningful slowdown in China. Beijing can act against this with monetary and fiscal policy. He resorted to a number of half-measures that kept the situation under control. However, faced with a significant government debt burden, China has been reluctant to embrace dramatic policy easing. It is fast approaching the point at which it may have no choice but to do so.

Now, China must look back on free spending on geostrategic projects in its race for superpower status. For example, between 2014 and 2018, the Chinese Navy built more new ships than the fleets of Germany, India, the UK and Spain combined. To establish itself as a leader in experimental physics, China announced the construction of the world's largest Large Hadron Collider with a length of 100 kilometers. Domestically, a massive 12,000-kilometer expansion of the high-speed rail network has been announced.

To date, experts have argued that China could pursue global superpower status through one of two paths: 1) using its growing influence in the region as a launching pad; or 2) directly pursuing that status around the world. China has indeed tried both of these approaches over the past 10 years, using the Belt and Road Initiative to create a network of dependency vis-à-vis other countries, especially in Africa and Central Asia, as well as pursuing projects in the broader Indo-Pacific region. With a slower-growing economy and a large government debt burden, China may have to seek a more gradual path, starting in Asia before expanding so widely. China has already cut back on some Belt and Road initiatives in the Philippines, Pakistan and Ecuador.

China's race for superpower position with the US

Still ongoing, certainly, but China is clearly behind its rival in this race and falling further and further behind. This will either force China to be more careful in its aggression and power projection, or do exactly the opposite to divert people's attention away from these issues. For the sake of peace and stability, we should hope it's the former.

P.S. "If you're in control, you're probably not going fast enough," said legendary race car driver Mario Andressi.

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