Causes and geopolitical implications of the Chinese economic downturn

МОСКВА, 14 августа 2021, Институт РУССТРАТ.

When analysts examine information about the size and causes of the economic downturn in China, they usually discuss either forecasts made in the form of stress tests, or the reasons voiced during propaganda campaigns. Such campaigns are conducted either by China’s enemies or by its official authorities. This leads to the need to unravel a large tangle of layers, so to speak, informational “inverse traces” left in order not to clarify, but to confuse the understanding of reality.

Each concept has to be evaluated, first clarifying the degree of engagement of the source, and then weighing its reliability. If we do not go into the analysis of analytical reviews of various sources and their motives, but immediately go to the conclusions, we can state the following:

1. An important role in the informational pressure being put on China concerning a downward trend in its economic growth is played by international rating agencies, more precisely, the “Big Three”, known as S&P (Standard & Poor’s), Moody’s and Fitch. These agencies working in the bond market are in a more difficult position than the traditional media.

If journalists are forgiven for bias and are allowed (and sometimes necessary) to distort reality by presenting it in a more emotional format for the sake of popularity, then rating agencies cannot afford this – mistakes can lead to the loss of clients.

2. Back in 2016, Western experts estimated the decline in China’s economic growth to 5% per year, while Russian experts estimated it at 6.6%. The opinion of Russians was certainly influenced by the assessments of their Western colleagues, among whom were not only members of the “Big Three”, but also Professor of Stern Business School Nouriel Roubini, economists at Citigroup and analysts at Credit Suisse. We discussed the size of the decline in the Chinese economy and the impact of this decline on global GDP, but the general opinion was that a fall was inevitable.

Against this background, 31% of European companies said they were disappointed in their business in China. They were pessimistic about their future profits. The consulting company Roland Berger Strategy Consultants and the EU Chamber of Commerce in China conducted a survey of representatives of 506 companies and found that the share of pessimists increased over the year – in 2015 there were 23% of them. If 86% of respondents wanted to expand their business in China in 2013, then in 2015 it was 56%, and in 2016 – 47%.

It is necessary to say that in 2016, China showed 9.4% economic growth, and there was no factor of the coronavirus pandemic then. The forecasts were expressed as hypotheses in the form of an analysis of certain stress tests: what will happen if everything goes wrong. None of the experts expressed the fact that the very formulation of such a question affects the investment climate and is not an economic, but a political tool for using ratings as an instrument of unfair competition.

The figures named by analysts have never come true. The forecast for the growth of the Chinese economy in 2021 is 8.5%. The factor of the coronavirus pandemic has changed the picture. Experts note this year: the Chinese economy will go through a V-shaped path: a recession and then a recovery.

There are grounds for such an assessment. The Chinese Association of Automobile Manufacturers (11 largest automobile companies) announced a drop in car production by 36.6% in the first decade of June compared to the pre-crisis period, this is the second bottom in terms of the fall in their production. The first was in January 2020, when production fell by 20.2%. Smartphone production decreased by 32%, before that it fell by 8%.

There was no recovery. These are two industries that are the top of the industrial production chain. In the aircraft industry, the processes are longer, and the fall is not recorded on short tracks. The decline in smartphones and cars is the beginning of an avalanche-like decline in the entire economy.

The shortage of semiconductors and microchips is one of the reasons for the decline of the Chinese economy, stated in Hong Kong and foreign media as the reason for the decline. A microchip is the heart of any device today, the main component. The shortage of microchips will be overcome by the second half of 2022. Someone is talking about 2023.

But is the shortage of microchips really able to cause such figures to fall? China is experiencing a classic crisis of overproduction. They try to explain it by pointing to the pandemic, but it only accelerated the trends that had accumulated before its appearance. The decline in China’s trade with Vietnam – one of the most important markers – occurred before the pandemic, as did the accumulation of stock bubbles.

China fought the crisis with credit expansion – it poured $5 trillion into the industry. Production has revived. The failure in the cars was small, it lasted 2 months in 2020. The financial bubbles that accumulated on the stock exchanges and accelerated inflation were influenced.

At the moment, despite the projected growth figures, the Chinese economy has exhausted monetary instruments for accelerating production. Inflation accelerates prices, purchasing power falls, it cuts off loans, and banks are reeling. The People’s Bank of China has no reserves to close several financial holes at the same time. In the US, demand is falling. The Chinese are getting poorer. This is the real reason for the decline in production.

The problem is that the US Federal Reserve does not want to abandon monetary methods of dealing with the crisis and will continue to use them. This is the export of inflation, which is felt by the whole world – including the Russian economy. This creates a certain sphere of silence and translates the conflict of interests of states into a hidden form.

That is, in the politics of the United States and the West as a whole, there will be a trend of suppressing democracy, where the topic of responsibility will be blocked. The transfer of the topic to gender-racial issues serves to divert the focus of attention from the topic of those responsible for the crisis – they knew about it in advance and did nothing, since this means the redistribution of power mechanisms in favour of other, non-monetary structures.

There is a fight between the United States and China for the redistribution of the information technology and communications market. Here, China traditionally closes itself off from the West, which in response began to close itself off from China. The result of this fight was the beginning of the formation of clusters in the form of zones of economic and political domination of the United States and China. There is a fight for allies, where the decisive factor will be the position of Russia.

If the downturn in China’s economy falls with an impact on the drop in oil prices to $30 per barrel, then a decline in GDP will begin in Russia. One percentage point drop in China entails a 0.5 percentage point drop in Russia while maintaining the current monetarist course, according to representatives of the leadership of the Central Bank of the Russian Federation. Since the change of course is the most acute political problem associated with the global economy, it can be said that with the current figures this will not happen.

However, if the US is able to continue its monetary policy, then China and Russia have come to understand the exhaustion of this method for themselves. Dependence on the dollar generates unacceptable political and military risks, which means the curtailment of monetary instruments in both China and Russia. This will cause a new wave of sharp confrontation with the United States, as it means a breakaway from the American leadership by the two superpowers.

A slowdown in economic growth in China will reduce its impact on the largest producers of raw materials: Russia, Chile, Malaysia, Norway, Australia, which will increase the activity of the United States, which in turn will try to intensify this decline.

A decrease in the growth rate in China will lead to an increase in the internal struggle inside the Chinese leadership and an increase in the US’ interference in this struggle. In any case, this increases the importance of Russia, but creates instability both in its sensitive sales markets and on its borders.

In any case, the Chinese economy is moving to a slower pace of economic growth. Officially, the Chinese authorities maintain the goal of doubling GDP by 2035. However, social stability is necessary to achieve it. The Chinese authorities intend to achieve it by solving social problems (social justice), strengthening national security and strengthening state protection of state-owned enterprises, whose role will increase in the new conditions.

The same trends will be observed in Russia. However, the problem is that in Russia, with its private oligarchic structure of elites, there is no political basis for consolidating the management of state-owned enterprises and financial institutions. The central government has no one to rely on, pursuing a policy of nationalising the elite and protecting the economy from external pressure.

Such a support will have to be created, while avoiding shocks and collapses of management. The main requirement for the foreign policy of any Russian government will be the need to avoid a collision with stronger opponents or partners. Non-monetary development tools completely bury the liberal democracy of the usual sense, but everyone has been ready for this for a long time, but they are also looking for a way to keep up with competitors in this.

The preservation of a liberal economic structure is possible only in the EU – with the corresponding prospects of lagging behind, falling subjectivity and the pace of development. The growth of authoritarianism and centralisation is the privilege of the strong. This is an inevitable reaction to the crisis, possible only for sovereign centres of power. The whole question is what forces will conduct this course and what tools will it be based on.

Институт международных политических и экономических стратегий Русстрат

(@russtrat)