In the past, China has helped the world out of such weak spots, notably during the global financial crisis. But this time, its economy is showing pronounced weakness.
Car sales have plunged in China since mid-2018. Smartphone sales are falling. The real estate market has stagnated, with deeply indebted developers paying steep interest rates to roll over their debts. And trade frictions with the West, coupled with tough policies from Beijing toward foreign investors, make Chinese and foreign companies alike warier of further investment in China.
“European investment in China is going down,” Cecilia Malmstrom, the European Union’s commissioner of trade, said during an interview in Washington. “That is more because it is becoming increasingly complicated to do business there, with the forced technology transfer, with the lack of transparency, discrimination as compared to Chinese companies, with the massive subsidies of state-owned companies.”
For the heads of state and corporate leaders gathering this week in Davos, Switzerland, for the World Economic Forum, the Chinese economy could be the most pressing issue, even among the trade fights and political uncertainty plaguing the world.
Previous slowdowns in China, such as the one in 2015 and 2016, unnerved investors and global business leaders, setting off worries that multinational companies would lose profits from their Chinese subsidiaries, or that Chinese companies would dump their surplus production on world markets at very low prices.
Apple surprised markets this month when it warned of weaker-than-expected demand for its iPhones in China. Ford Motor cut output at its Chongqing joint venture by 70 per cent in November, in what Ford said was a move to reduce inventories of unsold cars. Chemical industry experts said mostly Chinese-owned chemical factories in Jiangsu had shut down because of weak demand and stricter enforcement of environmental rules.
The question is to what extent nervous business leaders elsewhere will postpone investment as China slows, and how many investors will dump their shareholdings.
“The global economy and financial markets are incredibly sensitive to China’s growth and currency outlook,” said Robin Brooks, chief economist at the Washington-based Institute of International Finance. “The immediate financial linkages are relatively modest, but they are swamped by sentiment channels.”
To be sure, further slowing in China is not the only risk to the global economy. A disorderly British exit from the European Union or a financial crisis in debt-ridden Italy could also be unsettling. In the United States, the national debt is rising and the stimulus from large tax cuts may start to wear off by next year. The US Federal Reserve could keep raising interest rates to keep inflation at bay, making it more expensive to borrow money, although it isn’t clear what the American central bank will do.
Still, the big question is, to paraphrase the line about Las Vegas: Will what happens in China stay in China, or will it become a global problem?
The World Bank aptly titled its review of this year’s outlook “Darkening prospects”. It warned that China’s slowdown could affect countries that export a great deal to it.
China is the world’s second-largest importer, after the United States. But the composition of its imports is unusual.
It is the largest market for a long list of commodity exporters, from Australia to Uruguay, thanks to its voracious appetite for iron ore, food, energy and other raw materials it needs to keep its economy humming. China is also a large market for factory equipment made in countries such as Germany and Japan.
But its imports of manufactured goods overall are few for an economy of its size. That has limited the dependence of workers elsewhere, particularly in the United States, on the Chinese economy.
The global impact of the Chinese slowdown could be limited if Beijing decides to borrow and spend its way into more growth. This month China has announced approvals for six municipal subway construction projects and three new intercity rail lines, at a combined cost of $US148 billion ($206.8 billion).
“The weaker the data gets, the more confident we get that they’ll tip a lot of stimulus into keeping the economy moving,” said Michael Blythe, chief economist at the Commonwealth Bank of Australia in Sydney.
Many of the biggest new construction projects are in China’s western regions, said Wang Min, chairman of Xuzhou Construction Machinery Group, a state-owned giant. The projects have been good for his company, China’s largest producer of huge earth-moving equipment, and its orders have soared in recent months.
But linking towns in sparsely populated areas of mountains and deserts is expensive. It adds large sums to China’s already very high levels of debt. And the investment may produce scant new economic activity to pay off that extra debt.
Previously accumulated debt lies at the heart of a one-two punch that has laid China’s overall economy low in recent months.
Vice-Premier Liu He promised at Davos last year that China would rein in the growth of credit within three years. Chinese officials then were confident they could head off a trade war with the United States.
They set about putting stringent limits on the country’s extensive shadow banking networks. Those networks had been providing a gusher of loans to the country’s small and mid-size enterprises, which China’s big, state-owned banks have long neglected in favour of lending to state-owned enterprises.
But by the end of April, as the economy started slowing, Chinese officials started to say that three years was not enough time. As credit dried up and many private-sector businesses ran low on cash, top regulators expressed worry at a Shanghai financial conference in June that they already might have gone too far.
Bid to curb influence
At the same time, momentum was building in Beijing to extend the influence of the Communist Party and state-owned enterprises, mainly at the expense of the private sector. The private sector is responsible for most job creation in China, and the rhetoric from Beijing further scared investors.
Less than a month after the Shanghai conference, the trade war began in earnest. President Donald Trump imposed the first of three tranches of tariffs on imports from China. Corporate executives say that by the time the third tranche hit in late September, consumer confidence was crumbling. Purchases of big-ticket goods, especially cars, fell fast.
Business confidence also slumped. A survey of 270 importers in the United States conducted in late December and early January by Panjiva, a trade data service, found 71 per cent planned to change how and where they bought their goods if tariffs did not change. And 87 per cent said they would do so if the Trump administration raised tariffs further.
Southeast Asia boost
As companies start moving their supply chains, the main beneficiaries seem to be southeast Asian nations such as Vietnam and Indonesia. But to the extent that those countries buy more factory equipment from places like Germany, some of the negative effects overseas from weaker sales in China could be offset.
Most economists predict the first quarter of this year will be weak in China. Many say the second will be, too.
However, quite a few say they have confidence in China’s consistent, four-decade track record of pulling itself out of slumps quickly. Chinese officials have put new emphasis in recent weeks on rebuilding confidence and are at least trying to reassure private companies that the government will not favour state-owned enterprises over them.
“As long as we can create a level playing field,” said Ma Jiantang, a senior economic adviser to China’s Cabinet, “private companies will surely succeed.”
The New York Times
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