China – taking stock
Overseas, the idea of Peak China is gaining traction, which is quite at odds with the full-on confidence in the further rise of China expressed by leaders in Beijing. The contradiction does suggest a need for policy change, but at least for now, that shift seems like the risk rather than base case.
Over the past three months, uncertainty over the course of Chinese development has intensified, with a steady flow of mostly bad economic news: yet another plunge in the stock market, which was already crumbling and kept afloat only by massive state intervention; mounting corporate debt; and a hemorrhaging of foreign exchange reserves, to name a few. The reality is that China is staring economic stagnation in the face, and the ruling Chinese Communist Party (CCP) is panicking.
One of the themes attracting attention in the China-watching world is Peak China, which these days, is pretty much the same as saying Peak Xi. The idea is most closely associated with an article from Hal Brands and Michael Beckley in Foreign Affairs, “The End of China's Rise”:
if Beijing looks to be in a hurry, that’s because its rise is almost over. China’s multidecade ascent was aided by strong tailwinds that have now become headwinds. China’s government is concealing a serious economic slowdown and sliding back into brittle totalitarianism. The country is suffering severe resource scarcity and faces the worst peacetime demographic collapse in history. Not least, China is losing access to the welcoming world that enabled its advance.
That article was published almost a year ago, but its conclusion seems to be gaining traction. On the economy specifically, Larry Summers has now gotten in on the act, saying in a recent interview that “People are going to look back at the economic forecasts about China in 2020 in the same way they looked back at economic forecasts for Russia that were made in 1960 or for Japan that were made in 1990”.
Larry Summers said that as recently as six months ago, it was “axiomatic” that China's GDP would surpass that of the US. That makes it sound like the current round of pessimism is new, which isn't really true. Indeed, Foreign Affairs carried another article with exactly the same “The End of China's Rise” title in 2016. The quote at the very top of the page is not from either of those, but from a third article with the same title, published by The National Interest back in 2012. Gordon Chang first predicted “The Coming Collapse of China” in 2001.
Given this history, China's obvious pushback to the latest wave of doom-laden analysis will simply be that there's always been a lot of naysayers. However, the renewed debate about Peak China is more interesting now than it has been. One reason is the economy has been looking properly peaky for a few months now, with no signs over the last week or so that the stresses are lifting. Activity data suggest cycle momentum remains poor, with exports shaping up to be the next shoe to fall. Last week's CPI and PPI releases continued to point to a risk of deflation in just about everything but food. And now the CNY is entering the fray, with the PBC's decision last week to cut the Forex Reserve Ratio just one indication that depreciation pressure on the currency is intensifying.
The other reason the foreign debate about Peak China is more intriguing than usual is the sharp disconnect between it and the ambitions expressed by China's own leadership. In this, it isn't just that leaders in Beijing aren't expressing the same concerns – after all, what leader or politician would stand up and say their policies are stunting their country's livelihood? Rather, the disconnect is that Xi Jinping's rhetoric isn't cautious in any sense, being instead all about how the Chinese Communist Party is leading China and its people towards a brighter, greater future. One example is in the speech he gave last year to mark the 100th anniversary of the founding of the party:
A century ago, China was in decline and withering away in the eyes of the world. Today, the image it presents to the world is one of a thriving nation that is advancing ith unstoppable momentum toward rejuvenation. Over the past century, the Communist Party of China has secured extraordinary historical achievements on behalf of the people. Today, it is rallying the Chinese people on a new journey towards realizing the second centenary goal.
That second centenary goal is that by the 100th anniversary of the founding of the People's Republic of China in 2049, China will have become a “modern socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious”.
The CCP, of course, has strong powers of propaganda, but it will be tough selling that message in thirty years time if the country's economy is indeed peaking today. This being the case, the growing contradiction between economic reality and official rhetoric continues to suggest a risk of a swing in policy to address the largely self-inflicted, sources of China's immediate economic difficulties: the property squeeze, zero covid, and related to the pandemic policies, the stagnation of consumption.
Last week there were rumours that property purchase restrictions would be removed in all cities except the biggest, and at his latest meeting to stabilise the economy, Li Keqiang did seem to suggest a move away from the supply-side focus of recent months:
While helping and protecting market players, we need to address the glaring problem of insufficient effective demand, promote the recovery of consumption as the main driving force, and do more to expand effective investment to create demand for market players and boost confidence.
However, there has been no confirmation of any significant shift in property policy, and while market sentiment towards the homebuilders is no longer collapsing, there remains little sign of any recovery. Furthermore, despite Li's apparent recognition of the importance of consumption, most of his comments last week continued to be focused on companies and investment.
Given the contradictions between China's current situation and the ambitions of its leaders, it does feel to me that a change in policy has to happen. But it doesn't yet seem that such a shift is imminent, and for the next few weeks at least it remains a risk rather than base case. Until that changes, the downwards pressure on the economy is likely to grow further.