By Peter Zhang
2019 is the Year of the Pig. Legend has it that one day, the Jade Emperor, a fabled ruler of heaven and Earth, decided to name the zodiac signs from the first 12 animals that came to his palace.
The slow pig, who stopped on the way for a lengthy meal, was the last one to arrive; hence, the pig is found last in the 12-year cycle of the Chinese animal zodiac.
While most Chinese tend to expect a safe and prosperous Year of the Pig, the Chinese Communist Party (CCP), on the other hand, appears to be apprehensive and nervous about the economy, and perhaps for good reason. Indeed, Murphy’s Law seems to be at work for China’s economy in the first three months of the Year of the Pig.
The ongoing U.S.–China trade dispute is having a marked effect. Chinese investment in the United States fell more than 70 percent in 2018 and will likely continue to drop in 2019, according to a McKinsey report.
Meanwhile, Chinese corporations also will face limited market access in America, in light of restrictions placed upon companies such as Huawei and ZTE. Furthermore, U.S. tariffs have effectively forced some foreign companies to move their production facilities out of China to southeastern Asian countries and elsewhere.
Manufacturing Decline
Based on the data released by China’s National Bureau of Statistics (NBS), China’s Manufacturing Purchasing Manager’s Index (PMI) declined at the fastest pace in three years to 49.2 percent in February, from 49.5 percent in January. (This PMI trend was reported by the Beijing-based business publication Caixin to have reversed in the month of March, with the PMI jumping to 50.5 percent, but many economists question how reliable that figure is.)
On March 27, the NBS also reported that industrial profits for the first two months fell by 14 percent to 708 billion yuan—the largest drop since 2011. Zhu Hong, senior statistician at the NBS, pointed out that the shrinking profits mainly come from manufacturing sectors, such as the automobile, petroleum processing, steel, and chemical industries.
Real Estate Investment Down
China’s economy is closely tied to its huge spending in infrastructure and real estate. By 2014, infrastructure and construction investment reached 35 percent of the GDP, of which real estate investment was 21 percent of 2014’s GDP. During the Japanese and U.S. housing bubble periods, the investment and GDP ratio were at 9 percent and 6 percent, respectively.
In China, so-called “ghost cities” are a unique phenomenon: local governments throughout China have built many high-rise residential quarters in an effort to stimulate the local economy and property market, but demand and purchasing power are weak, resulting in at least 64.5 million empty apartment units. The saturated housing market in recent years has also significantly reduced tax revenue for local authorities.
Not long ago, researchers at China’s Tsinghua University found that the population and economic activities in 938 Chinese cities—about one-third of the largest cities—shrank between 2013 and 2016. The affected cities had once relied on natural resources for growth, such as the coal-mining town of Hegang, in Heilongjiang Province.
Long Yin, a city planning expert at Tsinghua University, has inspected over 60 city planning blueprints with his team. At a recent panel in Shanghai, he said, “Most of China’s city planning is fundamentally out of touch with reality.”
An Aging Population
In 2010, China surpassed Japan as the second-largest economy in the world, and appeared poised to replace the United States as the leader as early as 2030, as predicted by some China analysts. Based on his study of the Chinese economy, Yi Fuxian, a senior researcher at the University of Wisconsin–Madison, avidly disagrees. He holds that China’s economy will never move up to first place, but will actually only retreat.
Yi said, “China is now facing an acute aging problem. The proportion of its population aged over 65 will rise from 12 percent in 2018, to 22 percent in 2033, and 33 percent by 2050. By comparison, the proportion in the United States will only be 23 percent in 2050 …
“China’s median age is forecast to increase to 47 by 2033 and 56 in 2050. In the U.S., the median age will be 41 in 2033 and 44 in 2050.
“China’s working-age population aged 20-64 began to shrink in 2017, while the U.S. working-age population will not peak until 2050.”
Overstated GDP Growth
According to a recent Brookings’ report, “A Forensic Examination of China’s National Accounts,” China’s economy is actually about 12 percent smaller than Beijing’s official numbers.
Further, China’s GDP growth estimates by the NBS in recent years have been inflated by nearly 2 percent. This report studied China’s national accounts between 2008 and 2016. If the 2018 GDP was overstated by almost 2 percent, as it was during the period of 2008-2016, it would imply that the government’s number of RMB 90 trillion for the 2018 GDP is too high by the substantial amount of RMB 1.8 trillion ($270 billion). In the past, the NBS attempted to blame provincial officials for providing inflated figures.
In Adam Smith’s words, “This is one of those cases in which the imagination is baffled by the facts.”
At the recent National People’s Congress, Premier Li Keqiang lowered the economic growth forecast to between 6 percent and 6.5 percent of GDP, recognizing the deteriorating economic downturn. Over the years, many Western financial analysts, economists, and Wall Street investors have seemingly been content to rely on Beijing’s cooked numbers for making business decisions and economic forecasting. But that situation may now be changing, as China’s debt grows.
China’s Mounting Debt
According to the Institute of International Finance, China’s debt-to-GDP ratio is 300 percent, compared to the United States’ 105 percent and Japan’s 250 percent.
While the latter two countries have open market economies, China’s centralized economy isn’t transparent and is dictated by the CCP, not the market.
Nonperforming loans are chewing up state-run banks. According to Charlene Chu, a senior partner at Autonomous Research, about 24 percent of total credit (some $8.5 trillion) in 2018 turned sour.
The state is, oftentimes, the banker, the borrower, and the regulator. In January, Chinese banks delivered a record 3.57 trillion yuan ($530 billion) in new loans to the corporate sector, in an effort to boost the slow economy. Some Western analysts worry that China’s $34 trillion public and private debt constitutes an explosive threat to the global economy.
This debt, along with the Chinese economy’s other problems, has raised alarms. Many longtime China watchers have sternly warned Western countries to take quick steps to disengage with China’s economy, so as to reduce risks associated with China’s upcoming economic meltdown.
Meanwhile, should the economy not prove to be a stumbling block for the CCP, the world also faces the risks of Beijing’s untempered ambitions.
Its “One Belt, One Road Initiative” is set to overtake the world, not merely economically, but politically and militarily as well. As Peter Navarro, assistant to the president and director of the White House National Trade Council, told Bloomberg: “It doesn’t matter to me who’s the most powerful or profitable country in the world. All countries want to be prosperous. What’s happening is a zero-sum game between China and the U.S., where their gain is our loss.”
Indeed, Navarro is right. The United States and China are engaged in a war on many levels—economic, political, ideological, and moral. As CCP General Secretary Xi Jinping made clear in a 2013 speech, “Socialism will inevitably vanquish capitalism.” So, Washington isn’t at war with Beijing on trade alone, but on a more fundamental issue of a way of life: an open democracy or a communist dictatorship.
Peter Zhang contributed this article which was previously published for EET. Peter Zhang is a researcher on China's political economy and a graduate of Beijing International Studies University, Fletcher School of Law and Diplomacy, and Harvard Kennedy School.