Beyond the immediate crisis, things aren’t much better in the longer term. China’s workforce is ageing and shrinking, creating a headwind for growth. Younger generations, meanwhile, are increasingly disaffected. Youth unemployment hit a record high of over 21 per cent in June 2023. The Government’s response was to stop publishing the figures. Small wonder then that market sentiment is so cautious.
While Western media outlets are increasingly willing to publish harsh criticisms of the Chinese leadership’s economic ineptitude, international institutions are still treading cautiously. In December, the World Bank published a readable, elegant China Economic Update which outlined in meticulous detail the quantitative evidence for a slew of ills currently afflicting the Chinese economy.
As befits the organisation’s expertise and credibility, the report also offers a series of suggestions as to what it would be “appropriate” for China to do to revive its fortunes. Given the degree to which Xi Jinping has taken personal control of the levers of state power, he is unquestionably the sole arbiter of high-level economic policy. It’s accordingly of note that there is nowhere in the entire 58-page document a single reference to the Chinese Communist Party (CCP), let alone Xi Jinping.
China’s economy is locked in a population doom spiral, loaded with bad debts. But as bad as the economic situation is, the political risks should weigh even heavier.
Diplomatic niceties and corporate nerves mean that this failure to name names is replicated in much heavy-weight Western assessment and analysis. The result is a widespread, misguided impression that China has an economy run much like any Western free market, with issues that might “appropriately” be dealt with in a relatively conventional manner.
It is probably true that a well-planned and executed programme of coordinated reforms could lessen a number of China’s current economic headwinds. But they will not be so dealt with, because that is not what Xi Jinping does.
An artificial, short-term surge in market optimism whipped up by the February 6 buying spree does not amount to a credible policy for fixing the mess that the CCP has made of its post-Covid revival, or for liberal economic reforms.
Xi Jinping has a completely different agenda, which includes such economically risky aims as annexing Taiwan, and continuing his support for Putin’s Russia. All his intervention in the stock market has done is highlight how irrelevant conventional market forces are in China.
Most rational Western analysis agrees that economic engagement with the PRC is unavoidable. China’s economy is locked in a population doom spiral, loaded with bad debts. But as bad as the economic situation is, the political risks should weigh even heavier.
China’s national strategy under Xi is driven by a political, military and economic contest with the West. The autocrat has staked his reputation on hard, exclusive Chinese nationalism and independence from the Western-led rules-based order. He has already shown in Hong Kong something of his intentions for Taiwan.
Last year, it was reported that 68 per cent of major corporations bought political risk insurance in 2022, compared with 25 per cent in 2019. China, where firms are subject to sudden expropriation, and operate at the whim of political overlords, was seen as a particular risk factor, and one it was increasingly hard to insure.
The US investment bank chief executive who last September said he was “highly cautious” about Chinese risk in late November stated bluntly that if there was war in Taiwan, all bets would be off; his bank would exit China if the US government ordered him to.
Economists and business analysts focusing on the prospects for a rise in GDP or a fall in unemployment are focusing on entirely the wrong issues. Our understanding of the Chinese economy was flawed, failing to see how much was built on debt and thin air.
The next thing to unravel could be our last, treasured illusions about how Xi will react to his country sinking into an economic mire, with a falling population. It’s time to prepare for a new cold war.
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