Recession fears fuelled in China
China’s current troubling growth slowdown is not a passing setback. In fact, China’s five-year GDP growth rate peaked long ago, in 2007, at 11 per cent
The economic model that has driven decades of remarkable GDP growth in China is nearing its limits.
That’s a worry for Canada and other major economies that count on China to bolster economic growth worldwide.
Among the leading factors now cited by experts who warn of a North American recession next year or in 2024 is the marked slowdown in GDP growth in China, the world’s second-largest economy.
Beijing set a target of 5.5 per cent GDP growth this year.
But declines in China’s auto, steel and construction sectors, among others, this year have forecasters expecting just over four per cent growth in 2022.
Which means we can’t rely on a robust Chinese economy to counteract the negative impacts of above-average western inflation, a sluggish recovery in global supply chains, and the fallout from a war in Europe.
China was able to soften the blow for Canada from the Great Recession of 2010-12 by continuing its significant imports of Canadian resource commodities.
And today, the Chinese export market is the foundation of
Ottawa’s ambitious Asia-Pacific Initiative to boost Canadian exports in an Asia-Pacific region that boasts the world’s fastest-growing economies.
But that foundation turns out to be weak, a problem that has often been warned of without global financial markets paying much heed.
China’s current troubling growth slowdown is not a passing setback, often blamed on a zero-COVID policy that has curbed economic growth with lockdowns of factories and population centres.
In fact, China’s five-year GDP growth rate peaked long ago, in 2007, at 11 per cent. It has fallen every year since, to just under four per cent in 2019, the last pre-pandemic year.
If China was to abandon its forced, or artificial, growth model for one that more closely aligned with western consumer economies, Beijing would have to accept a roughly 50 per cent drop in its annual GDP growth rates, to the two per cent to three per cent of mature western economies.
That’s the recent assessment of prominent U.S. economist Michael Pettis, a finance professor at Peking University in Beijing. Pettis is not alone in having long argued that China must convert to a largely consumer economy.
GDP growth in a consumer economy is much more sustainable and productive than state-sponsored and debt-financed infrastructure and property investment. Since the mid-2000s, that kind of investment in China has yielded unproductive assets, including vacant industrial parks and subdivisions and roads to nowhere.
The dangers of a bloated real estate sector that accounts for as much as 30 per cent of Chinese GDP were symbolized by last year’s effective collapse of land developer China Evergrande Group. Evergrande triggered a crisis throughout the vast Chinese property sector.
Meanwhile, consumer spending accounts for less than 40 per cent of the Chinese economy. The global average is about 60 per cent. “China has by far the lowest consumption share of GDP of any economy in the world,” Pettis reports.
The main reason is that Chinese households have little spending power because much of their income is taken by local governments.
Local and regional governments controlled by Communist Party of China cadres and ridden with some of the highest corruption rates in the world, are how the CPC runs every nook and cranny of the country.
Defunding those governments to boost consumer spending power is politically unthinkable.
The Beijing fixation with statesponsored infrastructure investment made sense in modernizing a country after five decades of neglect ending in the late 1970s. That’s when China embraced market liberalizations that spurred economic growth and lifted about 400 million Chinese from poverty to the middle class.
But that model is now outdated, producing negative returns on state investments while contributing to one of the world’s biggest debt loads.
China’s officially reported debtto-equity ratio in 2020 was 270 per cent. In Canada it was 117 per cent.
What sustains China’s forcedGDP growth model is vested political interests and the model’s perceived role in helping maintain full employment, essential in maintaining social order in a country without a western-style social safety net.
But that model of “fictitious GDP growth,” as Pettis labels it, has ultimately failed everywhere it has been used.
The most conspicuous failures include the Soviet Union’s forcedgrowth practices in the 1950s and 1960s, Brazil’s adoption of those methods in the same period, and Japan’s state-accelerated growth in the 1970s and 1980s.
The necessary scrapping of that failed model was followed everywhere by economic malaise, often lasting for decades.
As wrenching as the transition to a consumer economy would be, certain Beijing policy-makers who don’t yet represent a consensus have been promoting it for at least a decade.
They are sobered by the Soviet Union’s 1991 collapse under the dead weight of debt-laden statesponsored investment in non-productive economic activity.
Current Chinese President Xi Jinping must wonder if that is the legacy he wants for his rule and his country.