Postcard from China: Challenges for the Chinese economy
Throughout my Shanghai visit, the big background question concerned the health of the Chinese economy. Trump may have called a truce in the trade war last November, but expectations are for hostilities to resume in earnest in March.
Meanwhile, China’s economic data has been disappointing, with a slump in purchasing managers’ indices and GDP growth coming in at 6.4% in the fourth quarter of 2018, its slowest rate since the financial crisis. That figure would be the envy of most other countries, of course, but it is close to the growth rate deemed by economists to be required to avoid mass popular discontent. Most countries don’t have to consider a population of almost 1.4 billion that has become accustomed to staggering growth over the past 30 years. On top of this, car sales declined for the first time in over two decades, which was a real shock to many people I spoke with.
So what happens now? Well, the Chinese authorities appear keen to do something. But isn’t that part of the problem with the Chinese economy? The numbers fall until the government intervenes and sets it right. From talking to the company management teams that I met over my visit, I got a strong impression that there’s still considerable faith in the government’s ability to put everything right when required. That can’t be healthy in the long-term, but weaning companies – and local investors – off this reliance isn’t going to be easy.
The initial response from the authorities has been some monetary easing. The People’s Bank of China has announced a series of cuts to the reserve requirement for the banks. This means that the banks need to hold less cash and so, in theory, will lend more. However, the country’s major banks tend to favour the huge state-owned enterprises, so it’s still often difficult for smaller, more dynamic companies to get access to the borrowing they need to grow their operations.
Access to credit is one of the difficulties facing many entrepreneurial companies in China. I also wonder whether controlled access to the internet may restrict expansion into foreign markets over the long-term. Using the web in China was certainly an interesting experience. For one thing, there was no way of accessing Google or Twitter on local wifi, but I was able to access both by using my UK smartphone’s SIM.
That ties in with an embarrassing story for Huawei – quite apart from its current difficulties with Western governments. In the early hours of the 1st of January, Huawei employees needed to tweet “Happy New Year” and they were forced to use an iPhone with a Hong Kong SIM to access Twitter. This resulted in a “sent from my iPhone” message being included – much to the fury of Huawei’s senior management!
While the Huawei story may be amusing, it underscores the reality that China’s companies and population face in living with a government that restricts access to information. Another thing that I noticed during my visit was the number of people who had covers over the cameras on their smartphones and laptops. That suggests a distrustful attitude that may well be justified, given the Chinese authorities’ recent embrace of ‘social credit’ and the use of automation and artificial intelligence to enforce that system. There’s much more to China than an Orwellian state and, while its people are enjoying greater freedoms than in the past, there are still stark limits imposed from above.
That brings us back to the faith that many have in Beijing’s powers to keep the country running as they’ve come to expect. Though those powers are likely to be tested, especially if the Trump tariffs continue and other foreign governments become more suspicious of Chinese companies with close links to the state – such as Huawei. According to some I spoke to during my visit to Shanghai, economists at China’s major banks have been told – in no uncertain terms – that GDP growth will be 6% this year. As it becomes more apparent that China is not a perpetual growth machine, keeping the show on the road may prove to be difficult.
For many years, indebtedness has been one way to meet this challenge, but it’s hardly sustainable. Unstable amounts of local government debt are posing increasing problems and the instability of lenders is becoming more apparent too. My visit came just after the collapse of Xinhehui, only the latest of China’s peer-to-peer lending institutions to flounder. Such collapses – in which ordinary people risk losing large amounts of their savings – are likely to foment popular discontent, which is what the Chinese authorities, wary of the fate of many imperial dynasties, fear most of all.
While there are certainly lots of opportunities in China’s vast economy, there are clearly perils and pitfalls too. All in all, my Shanghai trip gave me plenty to think about. I suspect that many of those themes will be prominent in our strategic thinking for years to come.
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