Current Affairs

There is an argument that China’s economy is entering a difficult phase dependent on growth. The worries concern prime industries but especially the property market and high end manufacturing, but the arguments in the FT and elsewhere is that China is entering a bubble where stocks, property and currency are overvalued, which doesn’t quite tally with economists who are comparing the market to Japan’s.

China’s third plenum is unlikely to tackle the issues that most concern the economy. Don’t be surprised to hear President Xi Jinping announce that China is moving into a critical industrial push towards a green agenda. But the argument is how is China going to dig itself out of the trap it finds itself, where economic growth is sliding and investments in high tech industries are yet to bare the returns that were expected.

Most economists have focussed on China’s property industry and falling demographics, but Xi has announced time and again that China was going to dig itself out of the malaise of the present economic sluggishness, through turning the country into a high end tech hub that is helping the world to transition toward the green agenda. The evidence he is presenting does not take into consideration how China’s consumers spend – and on what. Since the shutdown, Chinese consumers have tightened their belts and fastened their wallets, forcing the state to export as much as possible to keep the economy afloat.

But the tightness in China’s market does not necessarily mean that the state cannot depend on its domestic market, but the significant factor is that domestic consumption is poor and China maybe moving towards stagnation rather than a domestic crash. This is also a signifier that internal investment outside industry, exports and international industry has contracted because investment is unbalanced. These are some of the reasons that economists argue that there is an element of Japanification happening to China.

Samsara Wang an analyst argues that Japaniifaction is down to factors such as a “peaking population, higher residential vacancy rate, higher house prices, tighter property linkages to the economy, a more challenging geopolitical situation, and little room for macro policy stimulus.”

These are all factors that are affecting China’s internal market at the moment and how China stimulates the internal (domestic) market is dependent on what President Xi argues at the plenum on the 15^th July this year. But the factors that are developing in the economy are serious, if the President is not able to get domestic spending to grow and saving rates brought down by investments in property then the economy will continue to stagnate. There has to be a realisation that the property bubble needs to burst to bring down prices and force investors to release the empty properties they are shoring up with their savings.

The artificially high prices investors hold on their properties is a bubble, which if nothing is done will lead to further stagnation of the domestic market and also tighten the purse strings of a the domestic workforce who cannot get onto the artificially inflated property market. This signifies that the population has very little belief that the state can do anything to change the way the domestic market works at the moment.  If the property market doesn’t deflate then China will face the same problems that Japan faced in the 1990s and onwards. Factors such as labour supplies, ageing population or a property market that doesn’t reflect the real market value, which are all signifiers that China is in for a long domestic recession that does not reflect the strength of an economy that has been buoyed by exports. Whether the currency is fairly valued is dependent on how you view the Chinese economy and whether the Yuan has been held at an artificially low market rate to encourage China’s manufacturers to export and investment to come into the economy is a question that is on the minds of investment companies.

Samsara Wang argues that China has a “lower urbanisation ratio, an abundant labour market despite an ageing population, an under-or fair valued currency, less stretched stock market valuations, a larger domestic market, limited damage to Chinese entitie’ balanced sheets resulting from the housing market correction, lower GDP per capita and stronger bank balance sheets.”

However China is reaching a critical phase in its development and as the largest polluter of green house gasses you shouldn’t be surprised if the industrial arguments supersedes the argument for domestic investment in President Xi’s speech. The continued investment in the economy challenges even the most ardent critic. Debt will be taken on for investment and the yuan will remain weakened as growth is generated through the industrialisation of further parts of the domestic economy, especially through investment in green projects, which Xi will try and kick start.

China is very much in the position of Japan throughout the 1990’s, but ultimately it is a more centralised and state controlled market place. But with the war in Ukraine and cheap investment coming from sources that were once weary of the Chinese market place, the once worry-some domestic market is being superseded by agreements between Russia and China. Though this is an international market that is in the favour of the Chinese exporter, the agreements between the Chinese government and Russian government are proving successful at taking off some of the pressure on the consumer market, which is very staid.

But the property market still weighs down the domestic market and the consumer is very wary of entering the market as supply outstrips demand in most provinces. But other concerns are whether respite can be found by overseas investment in property, or whether these investors view the market as a bubble still.

Investment is proving difficult in a market that is not spending on domestic production and the population is finding itself in a market place that has zero growth and deflationary pressures on consumer products, which have been built for this market only. This is forcing manufacturers to look for other markets that are keener to buy the goods they are selling and the deflationary pressures that have built up on the domestic market are forcing some manufacturers into insolvency.

The stock market has been dominated by manufacturers, though not a bubble yet, there are factors that are weighing heavily on the investor, such as returns for the high tech industry that is ever expanding but not necessarily giving the returns expected in end of year reports. Losses are significant because of growth, but with the US and Europe placing tariffs on imports coming from China, there is a realisation that companies are being forced into either cutting costs even further, competing directly on price or investing in the markets that tariffs are being set.  

Where President Xi goes from here is dependent on how he sees the future for China and whether there is any further development that he can push through to help the struggling domestic sector. China, is pushing for a high tech future and though exports are promising, there is a realisation that the domestic market is haemorrhaging wealth and potential growth. But as Samsara Wang argues China does not necessarily have the components that will lead to the Japanifacation of the countries economy yet. But there are elements that do and that is all in the domestic market where there is an ageing population, a stagnant property market and a domestic market that is ticking over, but that is it. Look out for where Xi Jinpings focus will be and whether he will continue to push for investment in green industries as an alternative to the stagnation of the domestic market.