China’s Black Hole
With both property and stock prices caught in a downward spiral, Chinese consumers are spending less on consumer goods, travel and discretionary purchases
How bad is China’s economic crisis? It is a lot worse than official numbers from Beijing seem to suggest. The problem is not only a demographic Armageddon that stares China in the face with the country’s population estimated to halve within two generations. The more immediate problem is that Chinese consumers aren’t buying enough of anything. Domestic production vastly outstrips consumption.
The result: empty townships, shuttered malls and a paralysed stock market. In what appears to be an emergency measure, Beijing recently cut interest rates on mortgages worth USD 5 trillion (Rs 418 lakh crore) in an effort to rescue the real estate sector that has been reeling for years after the collapse of several large realty companies.
The wealth of most Chinese citizens is locked up in real estate and equity. With both property and stock prices caught in a downward spiral, Chinese consumers are spending less on consumer goods, travel and discretionary purchases.
China continues to manufacture at a frenetic pace, worsening the supply-demand mismatch. As The Wall Street Journal put it: “China’s economy is unusual. Whereas consumers contribute 50 per cent to 75 per cent of gross domestic product in other major economies, in China they account for 40 per cent. Investment, such as in property, infrastructure and factories, and exports provide most of the rest. Lately, the low consumption has become a headwind to China’s growth because property investment, once a major component of demand, has collapsed.
“Logan Wright, head of China research at Rhodium Group, a US research firm, said China accounts for just 13 per cent of the world’s consumption but 28 per cent of its investment. While many developing countries relied on investment and exports to fuel early growth, China is an outlier for how low its consumption is, and its sheer size. In a report, Rhodium estimates that if China’s consumption share equalled that of the European Union or Japan, its annual household spending would be USD 9 trillion instead of USD 6.7 trillion. That USD 2.3 trillion difference – roughly the GDP of Italy – is equal to a 2 per cent hole in global demand.”
While becoming the ‘factory of the world’ China didn’t fix the lack of domestic demand. What it can’t sell domestically, China exports. That is why Beijing is running the world’s biggest annual trade surplus of nearly $1 trillion on total exports of $3.7 trillion.
China is the world’s largest manufacturer of electric vehicles (EVs). What it can’t sell at home it sells overseas. But with the European Union (EU) last month slapping tariffs of up to 36 per cent on Chinese EVs and the US likely to levy even higher import duties, Beijing is being forced to look at alternative markets.
Chinese EV makers such as BYD and MG Motor are investing in India with local partners like the Jindal group. India is the third largest passenger vehicle producer in the world but its EV production is in its infancy. China sees India’s EV market potential as larger than any country outside the US, Europe and Japan, all of whom are targeting Chinese EV exports with steep tariffs.
Despite making some of the world’s most advanced supercomputers, semiconductors and EVs, China refuses to give up its decades-old tradition of exporting low-value products, including intermediates used in pharmaceuticals and other industries. Officials in China, quoted by WSJ, boast that “it is the only country in the world to produce in every single one of the United Nations industrial products category.”
According to Andrew Batson of Gavekal Dragonomics, President Xi Jinping has instructed his bureaucrats to “establish the new before breaking the old. As a result, China provides fewer opportunities as an export market for emerging countries while competing head-on with them in the low-tech and mid-tech space.” Whether it is toys or plastic trays, China refuses to surrender market share in low-priced, medium-quality products that propelled its initial rise in the 1990s.
Demographic Decline
Apart from reducing interest rates on mortgages worth USD 5 trillion in order to put more money in stretched consumer pockets, China is tackling its demographic decline by raising the retirement age. The new retirement age for men will rise from 60 to 63 and for women from 55 to 58 in phases over a period of 15 years, beginning from January 1, 2025.
China has 297 million people over the age of 60. That is 21 per cent of the country’s population, making China one of the world’s oldest countries. And the pace of ageing is increasing. Life expectancy has meanwhile risen. The outcome: a growing number of retirees and rising pressure on pensions. Critics say the new retirement policy will not make a material difference. Moreover, an incremental rise in the retirement age over an elongated period of 15 years will not address the more pressing problem of low domestic consumption and over-production.
Xi’s emphasis on greater state control of private enterprises has led Chinese stock markets to underperform. Chinese stocks are available at an average price-earnings (P/E) ratio of 11.5 on the Shanghai Composite Index. In contrast, the average P/E ratio of Nifty 50 shares is 23.6. Despite being twice as expensive as Chinese stocks, Indian stocks have a premium based on the future growth of the economy and corporate earnings. Both are under stress in China.
China’s economic black hole could become even bigger if Donald Trump wins the US presidential election on November 5. Trump has pledged to raise tariffs on some Chinese exports to 100 per cent, escalating the trade war he began in 2018 during his first term.
With the West shutting China out of its markets, Beijing’s problem of over-supply in the domestic market is likely to get worse. But it opens up a window of opportunity for India to leverage as China’s options narrow.
