When it comes to explaining the state of China’s economy, beleaguered Chinese investment bankers have apparently begun employing underhanded tricks in their sales meetings with foreign fund managers in Hong Kong and other parts of the world.
According to anecdotal accounts I’ve heard from several fund managers, these meetings typically begin with salespeople presenting carefully crafted slides that paint a rosy picture of China’s economic activities. These presentations repeat the official version that the country will have no major difficulties in meeting its 5% growth target despite numerous domestic and international challenges.
Often accompanied by a wry smile, speakers add: “That’s the official version we’re supposed to tell you. Now, this is what we really think…”
How is the economy in China? Where is the world’s second largest economy headed? Depending on who you ask, the answers to these questions can delineate two markedly different versions of China.
In the first version, widely promoted on the continent, the country’s leaders and official media highlight a confident economy on an upward trajectory. China is the world’s largest producer of electric vehicles and a key driver of global economic growth, accounting for more than 30% by 2023.
Under specific instructions to “promote a positive narrative about the bright prospects of the Chinese economy,” anyone, especially influential economists, who attempts to deviate from the official line and offer alternative theories is silenced or faces even worse punishments.
This version stands in stark contrast to one widely accepted in the international business community: China’s growth engines are showing signs of exhaustion, hit by weak growth, high debts and falling prices.
Now, China’s version faces greater scrutiny and intensified skepticism, just days before Donald Trump returns to the White House. The president-elect of the United States has filled his next administration with figures critical of China and has made clear that he will increase tariffs on Chinese imports on the first day of his second term.
During Trump’s first term, Chinese nationalists enjoyed calling him chuan jianguo or “Trump the Nation Builder,” a sarcastic assumption that his presidency would undermine America’s international influence and strengthen China’s global position.
These days, such sarcastic comments are less frequent on Chinese social media. This is largely because the US economy has emerged stronger from the chaotic pandemic period, while China’s economic slowdown, driven largely by self-inflicted mistakes, has heightened anxieties and spawned a recent wave of random violent attacks. in the country.
After dithering for too long, Beijing has finally begun rolling out long-awaited stimulus measures to shore up weakening growth and restore confidence. Indeed, Beijing’s stimulus package resembles the “three arrows” approach promoted by former Japanese Prime Minister Shinzo Abe to revitalize his country’s economy: monetary easing by the central bank, fiscal stimulus through spending public and structural reforms, including the promotion of domestic consumption.
Ironically, in clear contradiction to their own policy of “promoting a positive narrative about the bright prospects of the Chinese economy,” policymakers have conveyed a confusing message. Instead of clearly articulating the scope and details of the stimulus measures to manage expectations, Beijing has appeared to fire the arrows impulsively and at random.
The first arrow was shot at the end of September with great fanfare, when the central bank announced measures such as lowering interest rates, lowering banks’ reserve requirements and reducing the costs of existing mortgages. However, after a brief rally in stock markets, the euphoria quickly faded as authorities failed to explain what would come next and made only vague promises.
The second arrow came about a month later, when the government announced an additional issuance of 2 trillion yuan ($136.4 billion) to boost infrastructure spending and provide more fiscal support to indebted local governments. Authorities have since hinted at issuing more special treasury bonds this year, pending approval at the annual session of China’s legislature in March. However, the impact of this second arrow on the markets has been minimal.
Beijing has remained silent on the timing and scale of the third arrow, or whether it even exists. Some analysts have speculated that Beijing is waiting for Trump’s detailed plans for China before firing this third arrow.
This could be true and, more importantly, the Chinese leadership may need Trump to apply the necessary pressure to rebalance its economy. For decades, the ruling Communist Party has enjoyed taking credit for progress in economic reforms, but the reality is that external pressure is needed to force China to undertake painful economic restructurings.
A notable example is China’s accession to the World Trade Organization in December 2001, whose membership required significant changes to the Chinese economy and paved the way for years of economic boom. Beijing has traditionally relied on two growth engines: exports and infrastructure spending.
Now, with Trump’s tariff threats and rising trade tensions with the European Union, China’s export prospects for this year are bleak. As such, Beijing has few options other than boosting domestic consumption, the importance of which the leadership publicly recognizes but has not yet fully prioritized.
The key is to put more money in the hands of the population so that they feel confident in spending. In the last week, news emerged that the government has quietly increased the salaries of millions of public sector employees, the first major increase in a decade. Presumably, this was kept secret because they have not yet defined how much they will increase pension funds and social security benefits for the average citizen.
I end with this seemingly perverse logic that could benefit China: the higher the tariffs and tougher the economic sanctions imposed by the incoming Trump administration, the faster Beijing will act to rebalance its economy.
Note: this is an article translated and republished with the express authorization of its author. Link to original article.
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