It appears that the rest of the world is starting to lose faith in the Chinese dream. As a trade war with the United States continues, warnings that China faces a severe economic slowdown have rattled financial markets. Companies, such as Apple, have downgraded their profit forecasts amid anxiety about a slowdown.
Investors are reassessing their view of China as an economic superpower, which promises benefits for the rest of the world for many decades to come.
Signs of Trouble
It is rare to find respected economists within China who are prepared to challenge the official government line. But in 2018 an eminent economics professor from Renmin University, Xiang Songzuo, claimed that a “very important institute” within China had estimated that the country’s GDP growth for 2018 should be recorded at 1.6% — far below the National Statistics Bureau’s official figure of 6.5%. He even hinted that growth might have petered out altogether and that China might be in the early stages of a recession.
Challenging the orthodoxy of the official figures amounts to political heresy. The message the government always sends through its propaganda is that the economy is thriving — and will continue to thrive. The Communist Party tells its citizens that socialism with Chinese characteristics has made the country the envy of the world.
Risk of Exaggeration
Numbers which present China as a success story are used to stoke patriotic pride and to reassure the people of the Party’s legitimacy. This creates a strong temptation for those recording the information to present the government with whatever it wants to hear, rather than offer an honest breakdown of the numbers.
“The government sets an official economic growth target and a few months later announces that the data shows it has met its goals,” one former diplomat told me. “If you’re based in the provinces and you’re asked to send your economic growth numbers to Beijing, of course you’re going to say everything’s fine. As a provincial governor, your reputation depends on growing the local economy, so there’s every reason to ensure the numbers tell the story you want them to. And, of course, the numbers from the provinces are then compiled together to tell a story about the national economy, which is always positive.”
Outside groups also try to assess the outlook for the Chinese economy. The Paris-based Organization for Economic Co-operation and Development (OECD) has trimmed its forecasts for growth to 6.3% in 2019, followed by 6% in 2020. That would mark the slowest expansion in the Chinese economy since 1990.
The OECD’s China expert, Margit Molnar, warns that the forecasts could be lowered further, if the United States-China trade war intensifies. President Donald Trump has threatened to scale up the dispute. If he does so, it will inevitably have a further negative effect on China’s exports, imports, and its currency, the yuan.
If China’s economy grinds to a halt, the international consequences would be severe. China has accounted for about a third of the growth of the global economy in recent years. The outlook for other major economies is also uncertain. Japan must brace itself for a rise in sales tax in the autumn, and in the United States the beneficial effect of President Trump’s tax cuts of 2017 are quickly wearing off.
Trump’s trade war with China was driven by his America-first dogma, but it has not proved popular with many of the big U.S. companies which trade with the Chinese as it has disrupted their global supply chains. It has also hindered many businesses from Japan which use China as their manufacturing base.
Chow Chung-yan, executive editor of the South China Morning Post, has noted another problem: “The main cause of economic difficulty in China is not the trade war with America. It’s more to do with the structural issues. A lot of people want the government to offer stimulus to the economy, but other strong voices say it should restructure the system. I believe that the Chinese Communist Party is facing a crisis. It is gradually losing control.”
Interviewed by the BBC, Chung-yan even spoke of rumors of a political coup against President Xi Jinping: “The different factions are fighting, corruption is rampant, and the Party is losing touch with the grassroots. So, in the past five years, the top priority for the Party is not to think about human rights or how to build systems for a sustainable long-term future. The immediate goal is how to establish control.”
Nevertheless, the Chinese government retains huge influence over economic policy, and this allows Beijing to respond to a slowdown with a range of options.
Janet Henry, global chief economist at HSBC, expects the government to intervene: “In the past, China had responded quite aggressively to economic pressures. In 2009 and 2016 there was a massive fiscal stimulus which lifted infrastructure spending and floated all the boats of the global economy. Now they are being more cautious. We hear almost daily of measures, such as selective monetary easing, VAT cuts, and corporate tax cuts, as well as the injection of more money into the banking system to improve the supply of funds,” said Henry.
However, she believes that the international impact will be limited: “It’s more about the stability of domestic growth rather than lifting the global economy in the way that we’ve become used to in the past.”
Other experts, both within China and abroad, believe the best response is for China to recommit to the reform program, which appears to have stalled under President Xi.
Yukon Huang is a former World Bank director for China, now working at the Asia Program of the Carnegie Foundation for International Peace. He says: “In the past, the Chinese economy was largely based upon investment in infrastructure and industrial production, with strong party-led central control. Today China is a much more service-oriented economy, so a dominant system of party control, which worked very well in the past, may well stifle these kind of activities in the future.”
Author: Duncan Bartlett
Duncan Bartlett is the editor of Asian Affairs Magazine and a former Tokyo correspondent for the BBC. He also runs the news portal Japan Story and is a regular contributor to JAPAN Forward. This article includes quotes from interviews recorded for the BBC.