China on the slide

The recent Chinese economic update contains mixed messages for Australia. According to Premier Li Qiang who delivered the country’s annual Work Report three weeks ago, China has a projected growth target of about 5 per cent - the same figure as the past year. Whether this figure can be believed is questionable given its vagueness and the opacity of China’s data. Li also abandoned the traditional press conference following his report, in part due to his predecessor’s unusual frankness last year in conceding that there were difficult times ahead for the Chinese people. 

Even Li acknowledged the challenges. ‘The Chinese people have the courage, wisdom, to overcome any difficulties or obstacles,’ he said. ‘China’s development will surely endure storms and plough through the waves, [and] the future is promising.’

One thing can be assured: regardless of the nation’s actual economic performance, a result of ‘about 5 per cent’ will be officially proclaimed.

Commenting recently, the chief investment officer of Goldman Sachs Group Inc.’s wealth-management arm, Sharmin Mossavar-Rahmani observed that the ‘data is unclear — we really don’t have a good grasp of what growth was last year or what growth will be this year,’ she also said, reflecting the widespread view amongst economists about the reliability of China’s economic figures. While the official growth rate was above 5 per cent for 2023, ‘most people think that is not the real growth number — it was actually a lot weaker,’ she said.

The growth projection is good news for Australian exporters: shiploads of coal, LNG and iron ore will continue to flow to China, along with newly in-demand minerals, such as lithium. The biggest winner is the Australian Treasury -  and by extension the Albanese government - which will continue to reap the taxes and levies that result from our exports. Australia is in a better position than many countries, but over-reliance on resources exports is shortsighted. China will continue to grow, but the ‘miracle’ economy days are over.

There are losers also. As China ramps up its manufacturing in an attempt to fend off a slowing economy, cheaper imports will flood into other countries. The first wave of BYD cars landed in Europe last week - some 7,000 vehicles on specially made cargo ships. Hundreds of such cargo container ships made by China are scheduled to dump their EVs on the global market. These exports are being fuelled by cheap, state-provided loans as the government endeavours to stimulate the economy. R & D expenditure is increasing by 10 per cent. China had almost one-third of global manufacturing in 2022 according to the World Bank, and 14 per cent of all goods exports. An increase in these exports will affect domestic production globally. Consumers will be happy, but at what cost to local jobs? Local businesses are already being crippled with increasing costs and charges.

The bullish Wall Street projections about investing in the Middle Kingdom have all but disappeared. The real estate crisis threatens the savings of millions of Chinese people, and could wipe one per cent off GDP for the remainder of the decade. Youth unemployment is over 20 per cent; consumer confidence is in the pits; and local government debt has skyrocketed. Some $4 trillion has been wiped off local stocks  as foreign investors are abandoning the market.

According to Mossavar-Rahmani, China will struggle with a weakening in three pillars of growth - the property market, infrastructure and exports. A lack of clarity on China’s policymaking, along with patchy economic data, add to concerns about investing there, she said.

The country is also facing a decline in a significant growth factor, namely population. With the birth rate near one per child per woman, as much as a quarter of the growth has evaporated. Despite belated government efforts, the decline in fertility is unlikely to be reversed, as the experience of other countries indicates. A recent Chinese Communist Party Youth League survey found that 44 per cent of women do not want to get married. Unlike the West, where marriage is not an impediment to child-bearing, traditional family values still predominate in China. No marriage generally means no children!

‘All our clients are asking us [the] question - given how cheap China appears, people inevitably say, well, has it discounted the worst news?’ Sharmin Mossavar-Rahmani told Bloomberg Television. ‘Our view is that one should not invest in China.’

Even if the economic outlook was brighter, the regime’s determination to subject all activity, including private enterprise, to its will, is the cause of increasing nervousness.  New security laws impose severe penalties for the disclosure of state secrets but fail to define what is secret. Contravention is an arbitrary judgment. The executives of many major companies have left the country, including from Hong Kong, leaving the positions to Mandarin-speaking replacements who accept the new structures. Much of the vibrancy of the former UK colony has disappeared as the city becomes just another in the grey landscape favoured by the communist regime.

The Beijing regime is endeavouring to counter the economic warnings. The Chinese media Caihhxon Global recently published an interview with Martin Wolf, the chief economics commentator at the Financial Times, in which he said that it is ‘not at all difficult’ for China to extend ‘its rapid economic growth for another 10 or 20 years’. This however is predicated on the CCP making all the right choices, a scenario in which few commentators have confidence. To the contrary, Xi Jinping’s demand for ideological purity and total control of the nation - including the private economy - counters some of the measures required for higher growth.

China will continue to grow, but the rate is likely to be much lower than in the past. The economy will be increasingly subject to the dictates of the CCP’s state-dominated model which Xi believes is superior to western capitalism. The dangers for investors - and by extension trading partners such as Australia - are clear. Private enterprise will be increasingly subject to the dictates of the communist regime. Investing in China may be relatively easy; repatriating the profits less so. The demand for our resources is likely to slow. The visit by Chinese Foreign Minister Wang Yi and the promise of dropping the unwarranted restrictions on Australian wine exports will be accompanied by claims that relations have normalised, but the fundamentals have not changed. The case for the increasing diversification of our trade is overwhelming, despite the siren calls from a few people either struck in the past model or profiting from the current arrangements. The Australian government should heed the economic changes, otherwise the nation will be tied to an increasingly problematic future. If it continues to use the resource taxes to fund otherwise unaffordable expenditure, future generations will pay a heavy price.

First published in the Spectator Australia.