Ichiro Suzuki*
The Chinese economy is in trouble. This has already been well known for a few years, since the COVID-19 crisis. Three decades ago, China’s policymakers witnessed Japan’s crumbling into economic stagnation and mild deflation that lasted for a generation. They studied the process carefully and vowed to themselves never to follow Japan’s footsteps. Three decades later, China is suffering form the Japan disease that they made sure not to suffer. With bright minds the Communist Party deployed for the purpose of dodging Japan’s path, how has China ended up with where it is today?
To begin with, asset price surge on China’s super-normal growth in the early years of the 21st century was a bubble. The rise of China was real. Bubbles, however, brew not only on mere fantasies but also on real things. Expectations on China’s bright future drew vast amount of international liquidity both in foreign direct and portfolio investments. The renminbi came under intense upward pressure. It forced the authorities to revalue the currency a few times while the RMB has never been traded freely in the market. Foreign capital’s inflows and upward pressure on the currency presented a recipe for a bubble because of their immense liquidity boost.
When the deepest recession and the worst financial crisis since the 1930s hit the global economy, it was China that came to the rescue. Were it not for massive fiscal stimulus to boost then non-existent demand, the Great Recession of 2007-09 might have been a lot closer to a depression with double digit declines for the global economy. Top bank executives from New York and London flew to Beijing to beg for infusion of fresh capital in the face of quickly depleting capital base of their banks. The experiences in 2007-09 convicted the Communist Party leaders of the West’s permanent decline and China’s destiny to rise to the top. The experience in those times instilled immense pride in them.
Since the economic boom that preceded the Beijing Olympics in 2008 was too excessive, its aftermath needed to be cleaned up once it was over. Quite contrary to what was needed to be done, the Communist Party responded to every economic downturn with another fiscal injections, to prop up already high real estate prices, to keep them from falling at the very least. The Communist Party leaders shied away from embarking on reforming the economy to make it fit to the age of slower growth. Restructuring of the economy is always hard not only for democratically elected leaders but also for autocratic rulers because it always creates a large number of losers as well as winners. Especially for the CCP, legitimacy of their authoritarian rule has been tied to delivering economic growth to people who had been mired in poverty. Double-digit economic growth did it, until the Olympics in Beijing.
Just about the time the Chinese economic momentum had peaked out, Xi Jinping rose to the helm of the CCP, advocating great Chinese dreams and restoration of China’s national pride. Then President Xi began to manage the economy, in a fashion comparable to that of Mao Zedong whose ignorance on economic issues inflicted staggering damages to China, including tens of millions of people who were starved to death. President Xi has presided over steadily worsening economic conditions. He is not responsible for the economy’s marked deceleration from the China under his predecessors, because there was no way for the economy to keep growing at those torrid rates. The slowdown, however, could have been managed a great deal better than how he had done.
President Xi increasingly became anti-West, with his intense focus on rejuvenation of Chinese nation. Election of Donald Trump as the President of the United States in 2016 made it worse, driving the bilateral relations to strategic competition. China continued to present the lure of the second largest market to the rest of the world. The West, however, didn’t kowtow to the Communist Party for the privilege of access to the market, contrary to President Xi’s expectations. The COVID-19 crisis made Western multi-national corporations aware of the risks associated with over-dependence on China. They made a move to reassemble their global supply chain and brought some factories back to or close to home. Tightened national security law made it even worse for western MNCs with enhanced risks of doing business in China. Though increasingly hostile business environment still hasn’t caused MNC’s exodus, they are leaving slowly, leading to net outflows of their capital. At the time of super-normal growth, foreign capital tried to enter China in droves. This time around, amid liquidity glut globally, capital is leaving China, albeit slowly, at a time when the real estate bust is requiring the monetary authority to flood the economy with liquidity to keep it from sinking. Worse yet, venture capital money’s inflows from the U.S. have dwindled and wealthy Chinese people are making every effort to get their money out of the country.
In the meantime, Beijing has been the flag bearer of the anti-West bloc through the BRICS and the Shanghai Cooperation Organization. The former encompasses the developing world in a broader sense, originating from four countries that were believed to have been fast growing at the beginning of the 21st century. Originally BRICs represented Brazil, Russia, India and China with South Africa later added to make the group BRICS. On the other hand, the latter is a collection of countries where Belt & Road Initiative money poured in, concentrated in countries between China and Europe. While these organizations bestow an international prestige that China covets, these are, BRICS in particular, are paper tigers that carries a slogan but lacks economic substance, except in procurement of raw materials. While many of the member countries of the two organizations have China as their largest trade partner, they are of little help when it comes to providing China with capital that the country needs badly. The Shanghai Cooperation Organization members might be draining capital from China. Many of the member countries are heavily indebted to China through grand BRI projects whose cash-generating capability is so much in question.
CCP members who are better-versed in economic issues must have been alarming the President of the dire situation China has been facing. They probably have advised him on the importance of foreign capital to keep the Chinese economy going. President Xi met American business leaders to encourage them to invest in China. Of course, no executive with a sane mind takes his word at face value. The country has become a scary place to do business because of risks of arrest on top of risks of sudden regulatory changes at the whim of President Xi, which crushed China’s tech entrepreneurs several years ago. The West was down back then, but not out. Since then, the U.S., in particular, bounced back having restructured the economies. The U.S. banking system today is very well capitalized, with little Chinese help after all, in sharp contrast to China’s that struggles under capital shortage and mild deflation. Time has changed.
*Mr. Suzuki is a retired investment banker based in Tokyo, Japan.
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