China Daily Global Edition (USA)
Blinkered view
By ignoring rapid development of China’s digital economy and other factors, Fitch presents false outlook
Ratings agency Fitch downgraded its outlook for China in its most recent report. But the tenor of the report suggests that its economic assessment underestimates some significant factors. Although Fitch acknowledges the structure of the economy is changing as China shifts to a new growth model, it appears not to recognize the full significance and driver of this transition in its report.
Applying the traditional framework of economic analysis leaves Fitch on shaky ground. Veteran US analyst of the Chinese economy Nicholas Lardy writes in Foreign Affairs that it is important to distinguish between cyclical and structural factors. One cyclical factor is China’s industrial production which recorded its fifth straight month of expansion while core consumer prices are firming.
Construction is a significant cyclical factor. China Evergrande Group, one of the biggest names in China’s property market, is the obvious example which seems to support the conclusions of Fitch.
However, Geoff Raby, former Australian ambassador to China, points out that the government has deliberately avoided implementing the stimulus packages of the past which would only add to housing oversupply. Instead, policies have supported lending to complete projects rather than starting new ones.
In 2023, the construction floor area completed exceeded the area started for the first time. This is a good start in reducing the excess property construction and restoring balance to the economy.
The central government could have chosen to bail out Evergrande. Had it done so the China detractors would have condemned the government’s intervention in the workings of a free economy.
When the central government did not come to the rescue, the same China detractors took this as evidence that the Chinese economy would “collapse” because this was considered to be the biggest threat to the world’s second-largest economy.
This type of liquidation is common practice in Western economies so there are well established processes to assist in successful restructuring without leading to economic collapse. Assets may be liquidated at a loss, but this does not mean the assets disappear. They become assets of another company operating with different balance sheet expectations. Fitch seems to assume this cannot be applied in China.
The Fitch conclusions also ignore the impressive history of China’s successful economic responses when faced with adversity. The response to the 2008 global financial crisis pulled the world away from the edge of the economic abyss. At the time, Western economists also warned it would lead to the collapse of the Chinese economy. It didn’t.
Part of the current response is the new bond issuance quota for local governments which was set at 3.9 trillion yuan ($538.8 billion), versus 3.8 trillion yuan in 2023. This signals the central government’s willingness to take a higher share of the burden of meeting growth targets, as local governments face slower fiscal revenues and depressed land sales.
Chinese economic policy is not developed on-the-run in response to the shifting sands of public hysteria. It is the product of careful analysis that adopts a long-term strategic perspective. The development of green and blue industries long before the West took these issues seriously is a good example of this strategic thinking.
New energy vehicles accounted for 30.25 percent of new vehicle registrations in China in 2023. Western auto manufactures are alarmed by the oncoming wave of competition because they have failed to develop in this area.
Raby says that the idea that China’s economy is struggling is news to those in the resources, energy, green industry or automobile sectors. In these sectors, China’s demand continues to surge or, alternatively, depending on who is speaking, China’s capacity “threatens” foreign competitors.
“The Fitch revision has reflected the fundamental concern over China’s fiscal health and its ability to drive growth in the long term,” said Dan Wang, chief economist of Hang Seng Bank China.
But the Fitch report fails to adequately factor in the advances in the digital economy and the impact this has on productivity and subsequent economic growth.
China is transforming from a manufacturing-based economy to a powerhouse of technological innovation. This seismic shift will help China avoid the so-called middle-income trap. Escape from the trap comes with increased productivity and for modern China that productivity comes from the digital economy.
China is making a transition to becoming the most advanced digital economy in the world and the rating agencies simply do not know how to measure its impact. In 2023, China’s online retail sales hit 15.42 trillion yuan ($2.17 trillion), up 11 percent year-on-year. The mobile payment penetration rate stood at 86 percent — ranking first in the world.
The measure of China’s economy is no longer how many miles of railway track are added each year. But it continues to be measured using industrial statistics that, while relevant, do not accurately fully describe the emerging economy.
The Fitch outlook underestimates the impact of China’s digital economy. Fitch’s fact-blind assessment misleads the public on the correct understanding of China’s economy.
China is transforming from a manufacturingbased economy to a powerhouse of technological innovation. This seismic shift will help China avoid the so-called middleincome trap. Escape from the trap comes with increased productivity and for modern China that productivity comes from the digital economy.
The author is an international financial technical analysis expert and a former national board member of the Australia China Business Council. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.