China’s re­bound is built on straw and leaves it on the road to nowhere

The Daily Telegraph - Business - - Front Page - am­brose evanspritc­hard

China’s V-shaped re­bound must be taken with heaps of salt. The coun­try has re­claimed all lost out­put since the pan­demic, but only by dou­bling down on an ex­hausted model of mar­ket-Lenin­ism that leads nowhere.

Re­tail sales fell 11pc in the first half and have yet to re­cover fully. The ser­vice sec­tor is still de­pressed. The 3.2pc rise in GDP from a year ago has been flat­tered by a mas­sive surge in metal-bash­ing for in­fra­struc­ture projects of di­min­ish­ing value.

It has gone into ce­ment-mix­ing for a real-es­tate mar­ket with over 60 mil­lion empty flats. Lit­tle of this “eco­nomic ac­tiv­ity” is re­spond­ing to any mean­ing­ful mar­ket sig­nal, and it amounts to eco­log­i­cal van­dal­ism.

The funds are be­ing chan­nelled through the 150,000 chron­i­cally in­ef­fi­cient state en­ter­prises (SOEs), which serve chiefly as a ma­chine of pa­tron­age and con­trol for Xi Jin­ping’s

Com­mu­nist Party. The more dy­namic pri­vate sec­tor saw a 7.3pc fall in in­vest­ment over the first half.

“Be­neath the per­fect V-shape lies an un­even recovery. And there doesn’t seem to be much of a cat­a­lyst for a faster catch-up by the lag­ging sec­tors from here on,” said Wei Yao from So­ci­ete Gen­erale.

The scale of stim­u­lus matches the vast pack­age launched dur­ing the Lehman cri­sis and has lifted the aug­mented fis­cal deficit to 15pc of GDP. But the 2008-2009 credit blitz is a bad prece­dent. It pushed the Chi­nese econ­omy into a debt-trap, a con­cept used to de­scribe a slip­pery slope where fur­ther debt is con­stantly needed to over­come the ef­fects of the pre­vi­ous debt. This short-cir­cuits the Schum­pete­rian cleans­ing of cre­ative de­struc­tion and ends in stag­na­tion. The West has been do­ing this too, but China is the arch-cham­pion. The postLehman stim­u­lus is deemed a mis­take in hind­sight by so­phis­ti­cated economists in China and by most ex­ter­nal ob­servers.

The World Bank says to­tal fac­tor pro­duc­tiv­ity – the mea­sure of au­then­tic eco­nomic gain – col­lapsed from an av­er­age rate of 2.8pc in the early 2000s to 0.7pc over the fol­low­ing decade. China has ac­quired an “old” econ­omy pro­file be­fore it is rich. The con­trast with the past take-off tra­jec­to­ries of Ja­pan, Korea, or Tai­wan is strik­ing.

Eco­nomic plenipo­ten­tiary Liu He vowed four years ago to break out of this trap with a blast of sup­ply-side re­form. Declar­ing war on the “fan­tasy” of per­pet­ual stim­u­lus, he de­scribed lever­age as the “orig­i­nal sin” of China’s un­do­ing. “Trees can­not grow to the sky,” he said.

Liu warned that if the coun­try did not bite the bul­let, the costs would be “much higher” in the fu­ture. “China’s eco­nomic per­for­mance will not be U-shaped and def­i­nitely not V-shaped. It will be L-shaped,” he said. The pan­demic stim­u­lus pack­age is ev­ery­thing that Liu has been fight­ing against. It is a full-blown pol­icy ca­pit­u­la­tion. While the in­fra­struc­ture spend­ing has pre­vented a surge in unemployme­nt – the Polit­buro’s chief worry – it en­trenches the most de­struc­tive forces in the Chi­nese in­dus­trial sys­tem. It is also a Faus­tian Pact that may have closed off China’s fi­nal chance to avert Soviet-style de­cline. We for­get now that

the Soviet Union also had large pock­ets of ex­cel­lence in its hey­day, but it is breadth and bal­ance that counts for a su­per­power. China’s re­turn to its worst in­dus­trial habits is an en­vi­ron­men­tal disas­ter. Global En­ergy Mon­i­tor says China is de­vel­op­ing 250 gi­gawatts (GW) of new coal-fired plants, twice the en­tire ex­ist­ing coal power ca­pac­ity of the EU. It has pro­posed an­other 41 GW so far this year al­ready and has re­laxed its “traf­fic light” sys­tem for lim­it­ing per­mits.

The ex­cuse is that the lat­est ul­tra­su­per­crit­i­cal plants will dis­place dirt­ier plants but this tech­nol­ogy curbs lo­cal air pol­lu­tion much more than CO2 emis­sions. It is hard to avoid the con­clu­sion that China is thumb­ing its nose at the world and is giv­ing up any se­ri­ous ef­fort to wean the econ­omy off coal, still gen­er­at­ing two-thirds of the coun­try’s power.

This is go­ing to be a big bone of con­tention as green ide­ol­ogy be­comes the new be­lief-sys­tem and mo­bil­is­ing po­lit­i­cal doc­trine of the West. Europe is press­ing ahead with its green deal; the US will move in the same di­rec­tion if there is a Demo­cratic sweep in Novem­ber. China will then be look­ing straight down the bar­rel of a co­or­di­nated EU-US car­bon bor­der ad­just­ment tax.

One rea­son China clings to coal is that its grand plan for 400 nu­clear plants has run aground. Ja­pan’s Fukushima melt­down led to a Chi­nese mora­to­rium on new re­ac­tors. This has since been lifted but safety stan­dards are tougher and that has changed the cost struc­ture.

The re­al­ity is that large nu­clear plants are no longer vi­able with­out ex­or­bi­tant sub­si­dies, dis­guised or other­wise. Plans by China’s CGN to build a re­ac­tor in Es­sex do not make any com­mer­cial sense un­less Bri­tish con­sumers are fleeced to pay for it. Off­shore wind farms will be gen­er­at­ing power at less than half of nu­clear cost by the mid-2020s, and they will come on stream rapidly, with neg­li­gi­ble safety risk.

The Chi­nese com­pany is black­listed by Wash­ing­ton for al­leged at­tempts to ac­quire US tech­nol­ogy for mil­i­tary pur­poses but in a sense that is ir­rel­e­vant. The UK’s nu­clear ex­pan­sion plans are a com­mer­cial ab­sur­dity and con­tinue only out of bu­reau­cratic in­er­tia. Tory hard­lin­ers should hold their fire against CGN. The cam­paign to drive it out of the UK in­fra­struc­ture’s sys­tem along with Huawei is un­nec­es­sary and is start­ing to feel like an anti-Chi­nese witch hunt.

All the Gov­ern­ment needs to do is to an­nounce that there will be no more spe­cial cross-sub­si­dies for nu­clear power af­ter Hink­ley, and that all new re­ac­tors will have to com­pete on the same foot­ing as fu­ture wind – that is to say, pro­duc­ing power at or be­low mar­ket prices, with no drain on the Ex­che­quer. The CGN prob­lem will solve it­self.

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