The Slowing Chinese Economy

• 16-Dec-21
• admin

Photo by Manuel Joseph from Pexels

 

Last week, economic data released in the US showed that the American economy is slowly recovering from the Covid recession.  Unemployment data released last week on 3 Dec, while not entirely on target, did not disappoint.   Omicron does not seem to pose worries to most economists.  GDP growth in 2021, according to Goldman Sachs is expected to be about 5.6 percent and 4 percent in 2022.   That’s pretty good.   

 

The focus on the Fed is clearly now on the inflation problem. 

 

At the same time, there seems to be some concern about the Chinese economy slowing down.   Right now, the consensus forecast for China’s GDP is at 8.0 percent for 2021 and probably 5.5 percent.   Some analysts argue that this is evidence of a slowing Chinese economy.  With two significant implications – that there will be a loss of engines to pull the global economy out of trouble caused by Covid 19 and that its lead over the US economy growth is slowing down.  

 

The numbers are what they are.  Indeed, analysts are saying that the decelerating Chinese economy is due to stagnation in its property market and the sky-high global energy prices.

 

If we look at China’s problems in isolation, yes there are challenges ahead.   But these are nothing compared to where we were at just about a year ago, at the end of 2020.

 

A year ago, Covid 19 was in full swing.   It was entering the winter of the northern hemisphere.   Covid fatalities were less than 200,000 in the US, the worst affected country.   Globally, there were about a million deaths.   At that time, there seemed no end in sight.

 

Vaccines were announced around this time in Dec 2020 and inoculations started almost immediately after that.  In the last one year, most developed countries have now become 70-90 percent vaccinated, at least among the eligible and the willing.   The crises in these countries seem to have passed.   Some citizens among the rich countries have even been jabbed three times which sort of assures that the chance of death is reduced to perhaps an insignificant probability even if infected.   It was a reasonably efficient response in a relatively short time.    Of course, there is still a lot of work to be done among the poor and the underdeveloped countries around the world. 

 

Given that the engines of the global economy are no longer seriously impacted by lockdowns, we should expect normal growth to resume in 2022, right?

 

Some pundits say that the global economic outlook is now clouded by other geopolitical challenges.   In particular, the situation in the East China Sea (Taiwan Straits), and on the borders of Ukraine would be destabilizing.   I am a bit more sanguine.    In both cases, all the contestants, ie America, China, and Russia, have come to the realization that military confrontation is not possible.   It has all been reduced to just verbiage, including last week’s so-called Democracy Summit of 110 nations organized by the Biden administration.  

 

That turned out to be a non-event.   Nobody seemed interested in following the proceedings, and it was undermined by two notable events – the switching of diplomatic recognition of Taiwan to the PRC by Nicaragua during the two-day event, an obvious snub of the US’ leadership in the summit; and the censorship of Taiwan’s representative in the same event when she showed a map indicating Taiwan to be not part of China.   Both events are diplomatic fiascos for Biden’s team and drew more attention in pro-China international media than the main show. 

 

Whatever it was, the jingoism and the sabre-rattling of the Americans have increasingly countered resistance from phalanxes of objective thinkers among countries, media and analysts all over the world.   It is by now clear the US is not in a position to fight either a war over Taiwan or the Ukraine, and even the narratives of genocide in Xinjiang and loss of democratic freedoms by Hong Kong are losing steam.   For example, here is an opinion expressed by Alan Smith, former chief executive and chairman of Jardine Fleming and former vice chairman of Credit Suisse First Boston, in Fortune magazine, earlier this year.

 

“What the ‘Hong Kong Narrative’ gets wrong 

ALAN SMITH

February 10, 2021 

Hong Kong has been my home for 50 years—27 years under British rule and more than 23 as a part of China’s One Country/Two Systems government.

 

Clearly the city has lost some of its mojo recently—due partly to the 2019–20 riots and partly to the downturn in business and social life amid COVID-19. Despite this, Hong Kong remains one of the best places in the world to live, certainly in terms of personal safety and its response to COVID. 

Why, then, do overseas friends keep asking whether I feel safe, and: Isn’t it time to move out?

The answer: What I call the Hong Kong Narrative, promoted by too many in the West as part of the larger ideological battle with China. So often, media portrayals of Hong Kong paint a dystopian picture, unbalanced and at odds with reality. Unfortunately, Hong Kong is collateral damage in a larger geopolitical struggle.

In this particular Hong Kong Narrative, there is only one story—one in which brave young pro-democracy demonstrators have faced brutal attacks from Hong Kong police acting on China’s instruction. The narrative also claims that Hong Kong’s new National Security Law has removed our basic freedoms and will lead again to the often predicted “end of Hong Kong.”

Each of these claims becomes far more complicated under closer inspection, however. Let’s examine them:

The pro-democracy demonstrators

During 150-plus years of British administration, Hong Kong was never a democracy. Governors were appointed without any local consultation, and residents never knew who, until they read their newspapers. I’m not denigrating these governors, many of whom helped the colony prosper—but they were not chosen by Hong Kong people.

That point is important, because the slogan “Give us back our Democracy,” widely used by protesters, is intended to mislead you into believing that China had removed democratic institutions that Hong Kong people had enjoyed in British times.

In fact, the first time we were given any say in the appointment of our chief executive (CE) was under the Hong Kong Basic Law—put in place by China, not Britain, in 1997.

The Basic Law provides that “the ultimate aim is the selection of the CE by universal suffrage upon nomination by a broadly representative nominating committee in accordance with democratic procedures.”

In 2014, the PRC tried to introduce universal suffrage to Hong Kong so that the election in 2022 would have been on the basis one man, one vote. To be sure, suffrage would have come with some constraints, as it does in many places. Most notably, voters would have been choosing among CE candidates selected by a 2,500-strong Nomination Committee, composed of businessmen, industrialists, trade unionists, lawyers, accountants, doctors, religious leaders, elected legislators, and Hong Kong members of the Chinese National People’s Congress. Still, instead of being welcomed as a move along the road to democracy, this proposal was rejected by the self-styled “pro-democracy” camp, who feared that a broadly representative nominating committee might not have chosen candidates acceptable to them. 

Because I support democracy and the real opportunity Hong Kong was offered to move progressively along that road, I resent the way the rejectionists have given themselves the description pro-democracy.

Since then, far too many of these activists beloved in some Western observers’ Hong Kong Narrative have displayed none of the characteristics you would expect from supporters of democracy—tolerance, respect for individuals, a willingness to listen to the views of others and to compromise in order find an acceptable solution.

There are countless examples where ordinary bystanders who argued with them were violently attacked by groups of masked, black-clad pro-democracy demonstrators. A worker was doused in petrol and set on fire by the black-shirts, suffering terrible injuries; a 70-year-old man clearing a road was killed by masonry thrown by demonstrators. Their leadership has refused to condemn these attacks, nor have they urged that those guilty of this inhuman behavior be brought to justice. 

For a significant cohort of the protesters, the more accurate label would be “anti-China activists.” The one thing that seems to unite them is not a love of democracy, but a hatred of China—evidenced in their firebombing of PRC-“owned” or China-supporting enterprises, their physical attacks on mainland Chinese tourists, their desecration of the Chinese flag, and the virulent anti-China slogans they have spray-painted in Hong Kong.

Police brutality

Hong Kong has been fortunate that riot police have rarely been called into action, and therefore the public have had little experience of the modus operandi of riot police around the world. Seeing the American police reaction to the Black Lives Matter protests puts events in Hong Kong into proper perspective: Hong Kong police have deployed less force, despite provocations of greater violence. Despite nightly firebomb attacks on Hong Kong policemen, no deaths and few injuries have been verifiably linked to the police.

A basic principle of the Hong Kong Narrative is that all bad things have their origins in China. When Hong Kong’s Extradition Law, which would have allowed people suspected of serious criminal offenses to be extradited to Macao, Taiwan, or the PRC, was first proposed in 2019, it was stated as a fact by pro-democracy activists that the proposal was a requirement from Xi Jinping, and that it was a mechanism to enable activists to be sent to jail in China. In fact, “political” offenses were specifically excluded from the Extradition Law. Only later was it accepted that this law was an initiative from Hong Kong Chief Executive Carrie Lam, designed in part to allow a Hong Kong man who has admitted that he killed his Hong Kong girlfriend in Taiwan to be sent back there for trial.

The use of tear gas has been blamed on “mainland” Chinese leadership, whereas the officer who made the decision to deploy it was in fact a British policeman who had joined the Hong Kong police in colonial times and risen through the ranks.

The new National Security Law

A fact seldom commented upon in the most extreme versions of the Hong Kong Narrative is that if the “pro-democracy” activists had not so clearly targeted mainland citizens and PRC institutions, and had not sought deliberately to provoke the leadership, the PRC might have been content to leave the Hong Kong security legislation unchanged.

Deng Xiaoping said only two things were off-limits post-1997: promoting independence for Hong Kong, or using Hong Kong as a base to undermine the Central Government. Was that too much to ask of Hong Kong?  For many of the anti-China activists it seems it was, and we must now all face the consequences.

The new National Security Law is always described in the Hong Kong Narrative as “sweeping” and “draconian.” Critics who use these terms have clearly never read the British Official Secrets Act or the American Patriot Act.

The NSL is reasonably brief and easy to understand and (unlike the Patriot Act) is not retroactive. It spells out specific crimes that are prohibited, such as arson in public buildings and blocking transport systems. Sedition remains an offense—as it was in British times.

The NSL gives the central government a broader hand in the governance of Hong Kong. Still, Hong Kong enjoys more freedoms than most places in Asia, the Middle East, and elsewhere, and benefits from a high-quality and independent judiciary. 

In sum: If your idea of Hong Kong is dominated by images of young idealists being oppressed by the state, you’re seeing the story through the distorted and very narrow lens of the Hong Kong Narrative.”

 

Similarly, an anti-domestic terrorism initiative in Xinjiang has been twisted, without evidence, into a tale of a million deaths.   A million deaths?  Come on…if those numbers are correct, there would be millions more refugees escaping a ghastly fate through porous borders with half a dozen countries in the west of China.   Where are the satellite images of caravans or even small bands of panicky people fleeing west?  Where are those refugees? 

 

The war-mongers have temporarily been silenced.   Most countries in the world are not buying into the fabricated tales of a heightened military contest initiated by China, who have no history of conquest or colonialism, even at the height of economic power repeated many times in five thousand years of history.    There will not be an alliance of the free and the democratic opposing the evil empires in China and Russia.   This is not the Cold War, nor a dichotomy of the planet into uncooperative economic regions, all over again.  And that’s good for global economic growth.  

 

Of course, it is true that China will inevitably and inexorably resume its position at the top of the world’s economic leagues in everything that matters.   Already, the Chinese are the largest economy in PPP terms, even with its per capita GDP at US$10,000 compared to the American one at US$63,000.   It is no rocket science to extrapolate China’s economy to rise to become twice as large as the US when Chinese per capita GDP grows to a mere US$20,000.   And with that, its current somewhat low-key military budget will give it a lot more punch.   All that is inevitable, because the bar is so low.

 

Yes, the Chinese economy is slowing.  Demand is slacking, supply is tight, and expectations are weakening.   Recent data show that retail sales did not grow by much.   And the housing market is slowing down with the prices of new homes in 70 big cities falling by 0.3 percent on average compared to the previous month.  (0.3 percent in a month?  Should we be worried about that?)   The PBOC is already reacting to those signs of slowdown, by lowering reserve requirements for its banks.  In time, that slowdown will be arrested.  After all, exports are still growing strongly.  

 

With the possibility of war reduced to just empty talk, and Covid 19 receding, we should not be too worried about the weakening Chinese economy in the short term.   We should not even be concerned about the US government perpetually running out of money and its ballooning debts.  For all we know, new engines of growth will come from unlikely places like Indo-China, as a new China-Laos high speed rail goes into operation and opens up new vistas in the Belt and Road Initiative. 

 

Forget about a few quarters of slow growth.  Forget the short-termism.   China’s growth will be consistent and irreversible over the rest of our lives.   And that’s of permanent importance.    

 

 

Merry Christmas and Happy New Year!   This commentary will resume in Jan 2022.

 

 

    

 

Wai Cheong

Investment Committee

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.