China’s Big Picture

China has puzzled me for quite some time now, not least because some of its biggest current challenges appear to be self-induced.

I have been fascinated with the Chinese economy since I first visited the country in 1990. It was soon after the Tiananmen Square massacre, and I was there only briefly; but I remember seeing thousands of people on bikes in Beijing, despite it being wintertime.

Since my stay coincided with a public holiday, I had the opportunity to visit the Badaling section of the Great Wall (which didn’t have such a smooth access road in those days). I wondered why there were so many tall modern buildings intermittently sited along the roadside. Like many other analysts over the past 31 years, I suspected that a propertymarket collapse might be in the offing.

But my clearest memory is of thinking that I had mistaken Beijing with Taipei, the capital of Taiwan, which I had also visited, logging the trip on a separate page of my passport to conceal it from the Chinese authorities, who had outlawed travel to the island in those days. The street markets seemed quite normal, scarcely different from what I was familiar with back home.

Likewise, the street life seemed more Western (for lack of a better term) than I had expected – even more so than the vibe I had picked up on that first trip to Taipei.

In any case, by 1998 – the worst days of the Asian financial crisis – it had become fashionable in the fast-money crowd to assume that a property-market collapse was looming, and that the subsequent fallout in China would take the regional crisis to a new level. I remember receiving a chain email with an attached video file supposedly documenting Chinese “ghost cities” of unused apartment blocks and office buildings.

But I was paying more attention to the market chatter about US authorities contemplating an end to the “strong dollar” policy.

The greenback had made a sharp rally against the Japanese yen, and this seemed to be driving Asian countries with dollar-pegged exchange rates or large dollardenominated debts ever closer to the abyss. Rumor had it that China had threatened to devalue the renminbi unless the United States did something to halt the dollar’s rise.

To me, it seemed quite likely that the US would indeed shift its strategy. Sure enough, the US intervened directly in the foreign-exchange market by purchasing some $2 billion of yen. While inflicting big losses on some leading hedge funds, this move marked the beginning of the end of the Asian crisis.

It was this episode that made me realize how important China was. Three years later, I coined the BRIC acronym to shine a spotlight on the growth potential of Brazil, Russia, India, and China.

In the early 2000s, all four economies did indeed experience explosive growth, but only China has maintained its strong performance (albeit at a slower, single-digit rate since the middle part of the last decade).

Throughout this period, I have often marveled at Chinese policymakers’ ability to manage economic challenges. Consider the 2008 global financial crisis. Far from being a debilitating blow, it spurred China’s shift away from a lowvalue-added export-driven development model.

Pre-Covid growth

In fact, until the COVID-19 pandemic, China was still growing in line with what was implied in the original BRIC thesis. In our analysis, we postulated that China could become as large as the US in nominal terms by the late 2020s, and that this growth could make the BRICs collectively as large as the G6 (the G7 minus Canada) by the late 2030s.

Ironically, owing to the renminbi’s appreciation last year, China’s nominal GDP rose sharply to almost $18 trillion in 2021, compared to $23 trillion for the US.

However, China’s economy faces powerful headwinds, and many of them are of the government’s own making. For example, Chinese authorities appear to be trying to punish some of the country’s most over-leveraged property firms at the same time that they are cracking down on a much wider range of businesses, from high-end tutoring services to leading tech firms.

These moves have severely dampened the private sector’s appetite for risk taking.

Another example is the government’s zero-COVID policy, which includes keeping China’s borders closed. This has sapped consumer confidence, and it comes at a time when relations with many leading Western countries are deteriorating, and when China’s own demographics are becoming less conducive to future growth.

Taken together, these policies will leave a mark. While China reported 8.1% real GDP growth in 2021, the highfrequency indicators that I follow point to a weakening of its growth momentum. Without more monetary and fiscal easing, the economy’s headwinds will continue to strengthen.

This brings us back to a big-picture issue that I thought about on my first visit to China.

Since then, I have always assumed that the Chinese people would accept the country’s structure of government and single-party leadership as long as they could aspire to join the global middle class and partake of its standard of living and opportunities.

If this is true, the current leadership is going to have to shift gears.