Headlines

Gauging the health of the Chinese economy is vital for politicians and businesspeople to understand the world economy. It is hardly insight to note that Chinese economic activity affects every aspect of the global marketplace. Indeed it has been China’s “miracle” economy which has been is primary asset over the past 30 years. China’s allure as a marketplace in which to sell your goods, as a supplier of low-end goods, increasing now as provider of high end goods, China’s eco-system of manufacturing and logistics is second to none when it comes to get stuff made quickly and cheaply. Government policy and subsidies means that China remains the competitive factory of the world much to the alarm of a growing number of countries.

China’s willingness to use the carrot of economic development and investment via its BRI program in return for implicit or explicit support for its broader geopolitical goals has won it partners, although not really friends, throughout the developing world.

For many decades the quality and breath of Chinese economic statistics and data series, grew in scope and breath. It was refreshing that in an environment where free discussion was firmly controlled by the party, economic discussions were very frank and open. While the politically sensitive topics drew the censors and police attention economic discussions were thankfully free of such heavy-handed intervention.

Plenty is still reported within China. Recent releases show weak retail sales and lower industrial investment but a lot of strength in the export sector, the traditional economic backstop in times of stress. The property market remains stuck in the doldrums with few initiatives on the cards to try and revive the sector. This broad weakness is mirrored in poor consumption metrics and higher unemployment numbers. Data like this has seen investment banks across the board lower growth forecasts for China and a broad expectation that the about 5% GDP growth target for this year will not be met. Other developments could even be spun somewhat positively. The increase in retirement ages admittedly from the very low levels currently could be seen as a first step in trying to address the looming pension deficient and social provision costs which will soon wash over China’s ageing society.

For the casual observer of China this might be considered part of the usual ups and downs of any economic cycle. As China’s economy matures it glory days of boom and boom, are being replaced by more regular cycles of boom and bust.

Behind the scenes

Sadly the casual observer is much mistaken if they think the slowdown in China is just a mature economy booming and busting. A much darker picture lurks underneath the surface, and often bursts through to better illustrate how far China has deviated from the old era of reform and opening.

Readers of this column will know full well how Xi Jinping has fundamentally changed course from the pragmatic reform and opening era of Deng Xiaoping. Not that all was running smoothly before Xi. China had problems a plenty, all well documented but at least within the economic sphere discussion was pretty open. Even discussion of what the government should do was open and active. Whether in academia, business, regulatory bodies, or government departments, both foreign and domestic voices exchanges ideas, argued, agreed and engaged across various fora to try and drive economic reform forward. That time has passed now. Cross border engagement is increasingly difficult with many domestic institutions reducing contact with their foreign counterparts and the more independent domestic voices being shut down online or sometimes physically as thinktanks close.

Removal of economic data series has been going on for a number of years. Earlier this year it was the removal of youth unemployment data which attracted attention. Just this week the removal of real-timedata of overseas buying and selling of domestic A shares via the Hong Kong Connect scheme came into effect. A more short-sighted and foolish move could hardly have been imagined by the regulators. The Connect scheme which opened Chinese markets to the world has been a huge success but fear and paranoia of mainland leaders that such data was too closely watched by domestic investors and has been done away with after nearly a decade of disclosure. It can hardly be a surprise then that foreign funds have fled from Chinese markets and for many portfolio and financial investors China has really become un-investable.

What the very top leaders actually know, what news they read and who helps form their opinions has often been a matter for speculation. It has always been understood that they had access to better data than what was presented to the public, it would be impossible to believe otherwise. It has also been the practice that a select group of individuals would be called upon to give very open and honest briefings to those in the State Council or Politburo yet anecdotal stories coming out of China indicate that such briefings while still part of the leadership’s information gathering have become stilted and formulaic, only echoing back to Xi what he wants to hear. So for those asking why the government isn’t doing more to support the economy, tackle the property market crisis or boost consumption there is a real question mark as to what Xi actually understands is happening in the country.

That leaves two, both very unappealing, scenarios. The first is that Xi and his closest circle simply aren’t being told what is happening in the country and therefore don’t feel they need to act. Or the second is they are being told how bad things are yet don’t know how to respond or they simply don’t care anymore about maintaining a strong economy which can employ the millions of young people coming out of colleges or support the tens of millions of middle class workers and retirees who have been bilked out of their savings in the property market.

Alarm bells ringing

Two recently reported episodes out of China show how worrying the situation is. One relates to Chinese investment bank, China Renaissance. The second to deliberating misleading classification of data to hide the size of China’s export economy.

In February 2023 China Renaissance founder Bao Fan was taken by Chinese authorities to help with their inquiries into various tech sector deals and fund raising. He remains under custody, has been forced to relinquish his posts at the company and has no access to the public, this family or even a lawyer. But in October of last year the company was requested to pay 78 million RMB to the China state for reasons which the company still doesn’t know. This has come to light because the auditor has been unable to classify the payment in the annual accounts for the Hong Kong stock exchange.

That a founder of a company can be “disappeared” and held for such a period of time with no legal recourse is already alarming enough but the payment for no apparent reason is a surprise to even the most cynical and jaded of China watchers. That corruption and bribes are common in China is not news, but the authorities don’t even seem to care anymore or try and hide their misbehaviour, and his after over a decade of Xi’s anti-corruption campaign! Even if the global publicity surrounding this payment results in clarification from the authorities the damage to China’s image is already done.

Bao Fan’s ongoing detention is perhaps the most high profile of the clampdown and shakedown of the finance industry with Bloomberg reporting this week that even middle level banks and brokers are being required to hand in their passports and that any overseas travel in being highly micro-managed.

That China has been an export powerhouse is not in doubt. Chinese exports, and imports, have been a huge catalyst for growth along the coast and then by extension further inland. But as more countries become wary of Chinese subsidies and dumping the question of Chinese trade surpluses has become as much a political friction as an economic one. A recent IMF report (Report 4 Appendix 7) related that since 2022 Chinese authorities have invoked a concept called factoryless manufacturing to effectively reduce the size of their trade surplus. It looks like a deliberate attempt by China to falsify the data to reduce the size of their surplus but the IMF too looks guilty of not calling out such deceptive practices.The very definition of exports and imports implies the movement of goods moving across borders. Cars built in Japan and sold in America are Japanese exports and American imports. Yet China has recorded goods which were made in China and sold in China as exports and imports. As an illustration take the following fictious scenario. US based Happy Jeans places an order for 1 million jeans at $5 per pair with China based We Make Jeans Co. The Chinese manufacturer then delivered the 1million pair of jeans to the Shanghai warehouse of Happy Jeans. The Chinese authorities record this as $5 million USD of exports.

Happy Jeans then sells these jeans across China under their own brand at $10 a piece realizing $10 million in sales. This is then recorded as $10 million of imports. The net effect is that China’s trade surplus is reduced by $5 million yet no goods have moved across any border. Economically it’s a sham but politically it reduces pressure on China from a growing number of countries both in the West and Global South which worry about its trade juggernaut and impact on their own industries.

Miracles no more

Doing business in China was never simple. There has always been corruption, there has always been plenty of lies and half-truths from the Chinese Communist Party and plenty of grey areas where conducting certain business in a certain way was fine until it wasn’t. Businesspeople who came expecting level playing fields and clear rules needed to adapt quickly because the country offered lots of opportunities to do things.

Today and for the foreseeable future it will remain the factory of the world, China’s ability to produce and consume goods isn’t going away, but as the above examples show there are alarms bells ringing warning of a highly arbitrary and at times deliberately deceptive regime who are hiding the real state of the economy from outsiders and probably have only a partial grasp of the challenges themselves.

Discussion of the very real problems in the economy is no longer encouraged. Those who call on the government to boost consumption fail to understand that low consumption by households is the very model which the state supports. Consumption will only rise if households gain more of the wealth created in the economy, but that distribution of wealth is reflective of the distribution of power in China and Xi wants power accumulating under him, not with the people.

This is not a country open for business. A recent commentary on State Owned Enterprise reform sounded like some ancient incantation of a now forgotten religion. There is no reform of note happening within the state sector, certainly nothing that can compare to the difficult and deep cuts which took place in the Jiang Zemin years. Xi’s is turning China inwards, self-sufficiency is the slogan, with the foreigners considered as potential spies and not to be trusted.

Is the Chinese economy collapsing? No, it isn’t and neither will it. A continual slow decline only partly shown via the ever-smaller set of economic data is it’s future. Immigration of China’s best and brightest will increase and they will take their money with him, if the state allows it. The economic outlook hasn’t been so pessimistic for over 30 years but only with political change will economic change be possible.