2023-08-22 16:13:00
“China is a ticking time bomb”, affirmed in mid-August in a provocative tone the president of the United States Joe Biden, referring to the difficulties of the economy of the country. In the summer torpor where heat waves reach record temperatures across the globe, the second power of the planet depresses the international financial markets, already weighed down by the prospect of a continuation of the rise in the rates of the central banks on both sides of the world. ‘Atlantic.
In the United States, the S&P 500 fell nearly 3.5% in one month, the Stoxx 600 in Europe by more than 3.6%, and in Japan the Nikkei by more than 2.5%. On the Chinese markets, the Shanghai index is down 4.66% over one year, and that of the Hong Kong Stock Exchange by 8.5%.
The circuit of credit and investment controlled by public authorities
The hope of a strong recovery of the second world economy since the end in November 2022 of the strict confinements imposed by the “zero Covid” policy is fading. China is even seeing the specter of a worsening real estate crisis reappear, with the threat of default by the private Chinese real estate giant, Country Garden, heavily indebted to the tune of 179 billion euros, unable to honor two interest repayments coming due. If the real estate crisis in China has never led to a major financial crisis, it is because, unlike the United States or Europe, the credit and investment circuit is strictly controlled by Public powers.
But this time it looks different. “Although the Chinese authorities have a remarkable track record in controlling economic crises, the difficulties raised by a significant slowdown in growth, associated with high levels of debt – in particular at the level of local governments and the real estate sector – are without doubt. previous “warned in mid-August the economist Kenneth Regoffrenowned for his work on state debts and their effects on growth.
Especially since economic uncertainties are compounded by geopolitical tensions between the United States and China, which are opposed, for example, over the sovereignty of Taiwan. A climate of cold war has set in, which has become more serious since the military operation led by Russia in Ukraine, which has seen a gap widen on a planetary scale between the emerging countries and the developed countries.
The economic indicators published in recent weeks are disappointing even if they need to be put into perspective. For the fourth consecutive month, manufacturing activity fell back in July, with the Purchasing Managers’ Index (PMI), a reflection of the health of the industrial sector, coming in at 49.3 points (below 50 points , it is a contraction).
Drop in international demand
Exports also stalled. In July, sales of Chinese products to overseas fell 14.5% year on year, according to dollar figures released by China Customs. This is their strongest decline since January-February 2020 (-17.2%), when the Chinese economy suffered the effects of the Covid-19 pandemic. In June, Chinese exports had already contracted by 12.4% year-on-year. Apart from a brief rebound in March and April, the Asian giant’s overseas sales have been in constant decline since October 2022. But this poor performance mainly reflects the drop in international demand, particularly from developed countries.
Industrial production also slowed in July (+3.7% year on year), following 4.4% a month earlier. Analysts expected a slowdown but more moderate (4%). For its part, investment weakened once more to +3.4% over one year over the first seven months of the year. This is its most modest rate of growth since 2020.
In July, the unemployment rate for the working population as a whole increased slightly compared to June to reach 5.3% once morest 5.2% in June. However, it is at the same level as August 2022. As for unemployment among 16-24 year olds, it reached a new record at 21.3%, but this high level is due more to a mismatch between supply and demand, with China training more and more young graduates, who do not find enough outlets.
“China’s macroeconomic landscape is truly worsening, with a significantly steeper-than-expected decline in growth, fears of deflation and a battered real estate sector that threatens the stability of the financial and credit system. , in particular that known as “shadow banking””dreads for his part Bruno Salvatore, director of investments of Generali investments partners.
GDP forecast to rise by 5.2% this year by the IMF
However, if we compare growth estimates, the 5% target set at the Chinese Communist Party Congress is not out of reach. In the second quarter, officially, GDP grew by 6.3%. This is less than the 7.3% expected by the market but it remains within the objective. The IMF, in its latest forecasts, predicts 5.2% this year and 4.5% in 2024. If these forecasts established in July do not take into account the economic situation in August, growth in China remains better this year compared to that of the United States (+1.8%) and that of the euro zone (0.9%).
In its analysis, the IMF stressed that the supporting factor would be consumption, which should compensate for the underinvestment in real estate.
Although household consumption marked time in July, with retail sales only increasing by 2.5%, following 3.1% in June and above all the surge of 18.4% in April, with the return of consumers to restaurants and shopping centers and a strong recovery in tourism, nevertheless, this is the seventh consecutive month of increases.
Beyond the figures, it is Beijing’s response to the slowdown that is disappointing investors. Far from adopting a vast economic recovery plan – like the IRA in the United States and the NextGenerationEU in Europe – Beijing prefers more modest and targeted measures, such as the reduction of key rates of the Chinese central bank by just 0.2 points decided on Monday on its key rate.
Lessons from the massive recovery plan of 2008
The Chinese Communist Party has clearly learned the lessons of the 2008 stimulus package of $460 billion put in place to respond to the financial crisis triggered by the subprime in the USA. “China’s current problems stem from the massive post-2008 investment recovery plan, a significant part of which fueled the housing construction boom. After years of rapid construction of housing and offices, the oversized real estate sector – which accounts for 23% of the country’s GDP (26% taking imports into account) – is now producing diminishing returns”analyzed Kenneth Rogoff.
This corresponds to the objectives of the regime to reduce the financial frenzy of the sector. “Houses are made for living in, not for speculating”, does not fail to remind President Xi Jinping. In reality, the interweaving of the sector in the Chinese economy is assessed differently than the real estate market, for example in the United States. “In China, the correlation is strong between its evolution and that of growth. It’s a threat if construction and real estate transactions fall, but a mainstay of economic activity if they don’t. Nevertheless, this sector does not really represent an exogenous threat to the economy, because it is subject to multiple controls by the political authorities, which we seem to ignore in the West. Cuts and expansions are largely adjustments resulting from political choices.explained at the start of the year to the Tribune sociologist Nathan Sperber, a specialist in the Chinese economy.
Thus, in 2020, to reduce the real estate bubble which threatened, Beijing imposed measures – the “three red lines” – to limit access to credit: the liabilities of companies might not exceed 70% of their assets, the net debt should not exceed equity, and cash should be at least equal to short-term borrowings. If they stabilized the sector, this change in the rules also revealed that giants of the sector heavily indebted had feet of clay: Evergrande since 2020 and, since a few days, Country Garden.
A monetary policy dependent on the rise in interest rates in the United States
If Beijing does not want to revive credit at all costs, it is not a question of restraining the sector, but of acting with caution, as evidenced by monetary policy. “The absence of a sharp and rapid decline in lending rates is more reflective of an internal debate within government over the nature and degree of easing required, policy space, and consideration of other risks. and priorities », comments Aninda Mitra, strategist specializing in Asia at BNY Mellon Bank, who mentions, for example, the risk of the rate differential between the rise in the United States and the fall in rates in China which is already putting pressure on the yuan. As a result, Beijing must wait for the next Fed meeting to best calibrate its own monetary policy decisions.
These hesitations faced by the Chinese power and the debate they arouse on the responses to be provided contrast with the assurance of the regime in 2020 when the Covid-19 pandemic was spreading. According to l’story Adam Tooze whose analyzes on crises are authoritative, the current difficulties would find their origin in the“overconfidence” of President Xi Jinping acquired with the success of the “zero Covid” policy during the first phase of the pandemic that propaganda explained by the superiority of the communist regime. It is true that at the same time in the United States Donald Trump denied the seriousness of the situation and that in Europe everyone for himself prevailed.
On the other hand, in a second step, Beijing underestimated the dangerousness of the mutation of the virus, which has become Omicron, not only making the “zero Covid” policy inappropriate in 2021-2022 but counterproductive, with the multiplication of strict confinements which have led to the fed up of the population and the seizing of the economy in entire regions. The delay in persevering with this policy while at the same time massive vaccination in Europe and the United States allowed a rapid recovery of the economy would partly explain the current difficulties, suggests the historian.
A thesis which is not unfounded since it was not at the initiative of Xi Jinping that the “zero Covid” policy was ended but it was imposed on him in November 2022 by members of the politburo. The strongest advocate of abandonment was Li Quiang. Last March, he was appointed Prime Minister and number 2 of the regime.
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