Economy On Steroids: China’s Double-Digit Decade Of Growth Is Now History

The Great Recession of 2008 ushered an economic boom for China, but on steroids.

The last three years, beginning with the pandemic and the consequent supply chain crisis, and the war in Ukraine and the resulting global slowdown, are going to push Beijing’s economic pursuits away from the double-digit growth they grew accustomed to between the early 2000s and the late 2010s.

The new reality is being steadily embraced by Beijing, as evident by the 5 per cent growth rate they are targeting for 2023. 

Given the economic foolishness witnessed last year, courtesy of the Covid-zero lockdowns, the 5 per cent growth rate looks achievable.

In 2022, Beijing aimed at a growth rate of 5.5 per cent but ended up short of 3.1 per cent. In the second quarter of 2022, China’s economy grew at 0.4 per cent (yoy). The economy bounced back in Q3 with 3.9 per cent growth, before slowing down in Q4, growing at 2.9 per cent.

Much of the slowdown in China, beyond the global situation, was Xi’s making. 

Covid-zero lockdowns resulted in protests by the citizens, ahead of the National Congress in October and also companies preparing to diversify their supply chains out of China.

The military aggression in the Taiwanese peninsula further complicated long-term plans for western conglomerates.

The likes of Toyota, Tesla, and Volkswagen had confirmed dented production numbers by May 2022, before the lockdowns intensified.

However, even without lockdowns, China’s economy is not going to enjoy the spoils of the post-2008 era. 

The faltering American financial system, starting with the Lehman crash in 2008, turned the attention towards China. From merely being the cheap labour driven export factory of the world, Beijing was now attracting western companies for its growing market size and purchasing power.

Money flowed into Chinese companies that were listed on the stock exchange in the United States.

While many companies, eventually, turned out to be shell companies with zero assets, the western belief in Beijing sustained. 

Even the Chinese government was playing in the gallery. From 160 per cent in 2008, the debt-to-GDP ratio increased to 273 per cent.

The increase came in the wake of the real estate boom as local governments embarked on a building spree, aping cities of the west, sanctioning an endless number of skyscrapers.

One of the famous economic legends of the 2010s was China using more concrete between 2011 and 2013 than the US did in the entire 20th century.

While the outcome remains questionable, construction alone did fuel one-third of China’s economy. 

But the victory run is now over. Ghost cities now plague the countryside. Incomplete real estate projects, developers borderlining on bankruptcy, and citizens robbed of their life savings through hefty down payments are few of the key challenges before Xi.

Quite like the housing crisis of 2008, China has a surplus of apartments, inflated in price, and a demand so weak that some developers were offering a one-plus-one on apartments.

The more adventurous ones were willing to accept down payments in the form of watermelons. 

Real estate developers, unlike the early 2010s, are unable to raise money through dollar bonds. The scare from the Evergrande crisis and delayed bond payments further impacted the real estate sector.

In March 2022, some of these bonds were paying a 32 per cent yield, higher than what was in 2008. The quantum of dollar bonds issued also came down significantly, compared to 2018 and 2019.

For Q1, 2022, the issuance was down by 97 per cent compared to Q1, 2021, thus triggering another crisis for the developers. 

The crisis in the bond market was so severe that in August 2022, investors were estimating close to $130 billion in losses, with over 500 bonds trading below 70 cents on the dollar.

Unable to generate revenue from the developers, the local governments turned towards Beijing. Xi’s government had to deploy LGFVs or Local Government Financing Vehicles to buy out lands from provincial governments at inflated prices.

For H1 2022, the LGFV purchases were $57 billion, 70 per cent more than H1 2021. 

In July 2022, the year-on-year change in revenues from land sales for local authorities was down by over 30 per cent. The housing sales have been in prolonged decline as well, with the last year-on-year growth witnessed in May 2021.

However, in 2023, even Beijing is limiting its financing through LGFVs, not announcing any budgetary increase.

Thus, the sector that fueled one-third of China’s economy for more than a decade has a supply surplus, weak demand, bankrupt entities, local governments without revenues, and helpless policy makers in Beijing. 

Can exports alone drive China’s economy? Not anymore. Not like they did in the 1990s or 2000s.

For starters, companies have grown paranoid after the unprecedented lockdowns in the last three years, and therefore, diversification is now a non-negotiable.

The cheap labour is not as cheap as it used to be, forcing companies to move to Vietnam, India, and other developing economies. Post-Ukraine, the potential threat from the Taiwan crisis is also being reevaluated. And finally, there is a global slowdown in demand. 

Recently, Hideo Tanimoto, head of Kyocera, one of the biggest producers of chip making components globally, questioned the viability of China as a manufacturing base for exports, citing the export controls announced by the White House since October 2022.

Semiconductors, the most sought after commodity after the pandemic, is now creating a new geopolitical equation.

The White House, through the US Chips and Science Act, is hindering beneficiary companies from expanding in China or working with the existing partners there. 

The problem for China, when it comes to exports, is two fold.

For the existing products, like textiles, electronics, chemicals, and so forth, there is competition coming from smaller economies like Bangladesh and Vietnam, and in the future, from India.

For the advanced technologies, like semiconductors, a critical component in manufacturing, China finds itself cornered in the last six months. Turns out, the ATMP (Assembling, Testing, Marking, and Packing) formula is no longer enough. 

There is also the contempt for the private sector in Beijing that complicates matters. Citing national security concerns, Xi has ushered a crackdown against the tech conglomerates, private players in the education sector, gaming industries, and financial services.

While policy makers have claimed, recently, that the crackdown is over, the private sector will need more than a mere reassurance.

Across the 2000s and 2010s, private players were quick to climb the ranks of the CCP, only to fall and then disappear (more about it here). 

Xi needs all engines of his economy to fire now, and reliance on one or two sectors will not yield the growth he desires, not even 5 per cent.

Other challenges for Xi include dodging US’ export controls, ensuring companies do not desert China for economically better pastures, recalibrating the Belt and Road projects, but most importantly, tackling the fertility rate problem that has only recently surfaced.

Turns out, Xi today leads a country which is slowing down economically, and aging faster before it gets rich. 

Endless credit, state-managed leverage, backing enterprises like Huawei, wolf-warrior diplomacy, and military aggression are not enough for China anymore.

The new decade comes with a new set of problems, one that Xi’s civilisational rhetoric cannot and Beijing’s policymakers cannot fix, yet.

When the economic history of the post-2008 world is written, many often like to remark that China bailed out the global economy.

Come 2023, and the question is that how will China bail out itself?