The three economic realities facing China

The 20th National Congress of the Communist Party of China (CPC) began in Beijing on October 16. While the run-up to the 20th congress has been dominated by talks of Xi Jinping getting elected as the highest leader for an unprecedented third consecutive time, the gathering will also have to confront serious and somewhat new questions as far as the Chinese economy is concerned.

The 20th National Congress of the Communist Party of China (CPC) began in Beijing on October 16. While the run-up to the 20th congress has been dominated by talks of Xi Jinping getting elected as the highest leader for an unprecedented third consecutive time, the gathering will also have to confront serious and somewhat new questions as far as the Chinese economy is concerned. An HT analysis of data on Chinese economy flags three issues which will perhaps figure in a big way in the party congress.

(AFP)

Slowing growth is a reality, but it does not seem to have affected Xi’s authority

Ironical as it may sound, China’s communist revolution has created one of the most dynamic capitalist success stories in the world in the last 50 years. In 1960, the earliest period for which GDP data is available for China in the World Development Indicators (World Bank) database, China was ranked fourth in terms of current dollars GDP in the world. To be sure, the 1960 database does not include countries such as Soviet Union and Germany, which were likely major economies. By 1978, the year when Deng Xiaoping assumed political power in China, China’s ranking had changed to eleventh among 134 countries. China made rapid economic progress under the reforms unleashed by Deng became the sixth largest economy in the world by 2000. By 2010, China became the second largest economy.

The Chinese economy has been losing growth momentum for some time, and this period actually coincides with the period when Xi Jinping has been in power. A comparison of compound annual growth rate (CAGR) of GDP under different leadership phases in China (1978-1989 has been taken as Deng’s period given his strong hold despite not being the president or the general secretary of the party) shows that the Chinese economy has grown at the slowest pace under Xi’s ten-year term. If future projections of the IMF are to be believed, its growth rate is expected to slow down even further. If Xi gets a third term in power and manages an endorsement of his cult like status from the party congress, it will mean that the slowdown in growth has not really hurt his popularity.

A real estate crisis could derail the planned soft landing for the Chinese economy

China’s growth miracle has been export led. At the peak of its export boom, merchandise exports had a share of 35% in Chinese GDP. To be sure, the net contribution of exports, once services have also been included has been much lower in the Chinese growth story. Net export of goods and services, as a share of GDP reached a peak of 8.7% in 2007. With the 2008 global financial crisis slowing growth in advanced economies and China’s trader power with the US heating up, the export engine of the economy is expected to lose its earlier ballast.

In order to compensate for the export driven slowdown, the Chinese regime has been trying to boost domestic consumption. While the share of domestic consumption has increased by more than five percentage points in the last decade, crisis in certain key sectors such as real estate – it contributed around 29% of the GDP in 2016 according to the National Bureau of Economic Research in 2020 – has raised concerns about the resilience of the Chinese economy. While the sector has been witnessing a price boom in the recent period, some of the biggest Chinese real estate companies have been battling financial trouble in the recent times. A major crisis in this sector could have serious implications for both household and financial sector balance sheets in the Chinese economy.

Can China move on from being the world’s factory to the third world’s bank?

One of the first major policies launched after XI Jinping assumed political leadership in China was the Belt and Road Initiative in 2013. This entails building large infrastructure projects with Chinese funding across the world. Programmes such as these will also lead to a large increase in Chinese credit to the world, especially outside developed economies. Data from the International Debt Statistics 2022 report shows that China’s debt to low and middle-income countries was $55 billion in 2011 which rose to $170 billion by the end of 2020. In 2020, South Asia’s debt to China increased to $36.3 billion from $4.7 billion in 2011. China is now the largest bilateral creditor to the Maldives, Pakistan, and Sri Lanka in South Asia.

What makes a proper assessment of the growing Chinese credit footprint is the fact that a large part of such lending might not be reflected in official debt statistics. A BBC analysis using AidData research reported that at least 40 low and middle-income countries have debt exposure to Chinese lenders that account for more than 10% of their GDP as a result of this hidden debt, which is often kept off government balance sheets, directed to state-owned companies and banks, joint ventures, or private institutions, rather than directly from government to government.

While China sees its debt driven investment programmes in the world as an engine of expanding its global dominance, the implications of this credit dominance for larger geopolitics could be far more difficult to envisage than China’s export surge. The uncertainty runs both ways, with China’s authoritarian regime arm-twisting smaller states to toe its line as and with economic crisis in debtor countries creating a crisis for lenders back in China.

Uma Gupta is a HT-HIL data journalism fellow