Is the worst over for the Chinese economy? Some economists think it is. Others disagree. The optimists point to higher than expected GDP growth of 5.3 per cent in the January-March 2024 quarter. Manufacturing activity has meanwhile moved into positive territory with the purchasing managers’ index (PMI) recording 50.8 for March 2024. That’s the first time in seven months that the manufacturing PMI has gone above 50, a reading which separates expansion from contraction.
Not all is rosy though. Trade volumes remain subdued. Foreign direct investment (FDI) plunged 26 per cent in January-March 2024 over the year-ago quarter. The real estate sector remains embroiled in crisis. Foreign investors have been unnerved by Chinese President Xi Jinping’s crackdown on global companies.
Till a few years ago Apple manufactured nearly 95 per cent of its iPhones in China. That has fallen to 75 per cent and is set to reduce to 65 per cent by 2026. India now accounts for manufacturing over 12 per cent of all iPhones. That figure is expected to rise as high as 25 per cent in the next three years. Tesla’s decision to start manufacturing electric vehicles (EVs) in India will broaden the EV market in the country where Tata has taken an early lead.
China’s problems are largely man-made. Xi’s pivot to state capitalism from private capitalism has unnerved both foreign investors and local Chines businesses. They know what befell Jack Ma, the founder of Alibaba, when he criticised China’s economic policies.
Real estate, however, remains China’s most intractable worry. According to Goldman Sachs, private developers face a financing shortfall of $553 billion. The rest of the Chinese economy though is showing signs of mild recovery. Exports are up. Factory investment grew 10 per cent in January and February 2024 while manufacturing in computers and electronics was up by 15 per cent for calendar 2023.
These green shoots might, however, quickly turn brown if geopolitical tensions in Europe and the Middle East rise. China’s economy is still driven by exports of over $3 trillion a year, despite trade restrictions imposed by the United States. As a result, Chinese exports fell from $3.73 trillion in calendar 2022 to $3.38 trillion in calendar 2023.
Like ally Russia, China is closely monitoring the 2024 US presidential election. In a recorded interview, Russian President Vladimir Putin said he would prefer a Joe Biden victory because Biden is a more old-school, mature and predictable politician than the mercurial Donald Trump.
Who does Xi prefer? Unlike Putin, Xi keeps his opinions to himself. China blames Trump for starting the trade war with China five years ago. But Xi is also furious over Biden’s sales ban of advanced semiconductor chips to China. Ultra-thin chips below 3nm are critical in devices powered by advanced artificial intelligence (AI).
The Biden administration though is pragmatic. It has revived high level contracts with Chinese leaders. The two countries’ defence and foreign ministers are in regular touch. US Secretary of State Anthony Blinken is scheduled to visit Beijing shortly.
Washington is closely monitoring China’s reaction to the Iran-Israel conflict. Xi has invested personal capital in arranging an entente cordiale between the Sunni and Shia powerhouses in the Middle East – Saudi Arabia and Iran. China has been guarded in its public response to the conflict but in private Xi has counselled both Tehran and Tel Aviv to de-escalate. For Xi it’s vital to keep trade flowing in the troubled Red Sea where ships are continuing to come under attack by Houthis in support of Palestine.
Xi’s key concern remains the West’s accelerated move to de-risk from China. The US-led ban on advanced semiconductor chips is forcing US chip manufacturers to sell lower capability chips to Beijing. According to news reports, “Intel will release two AI chips with reduced capabilities for the Chinese market in order to comply with US export controls and sanctions. The two chips, HL-328 and HL-388, are scheduled for launch in June and September.”
Nvidia too has plans to sell three China-specific chips after the US late last year tightened a rule capping the capabilities of AI chips that can be shipped to China.
*An uncertain recovery
Despite the unexpected spike of 5.3 per cent in GDP in the January-March 2024 quarter, other signs point to an uncertain recovery for China’s broader economy. Deflation is a major worry. It reflects a lack of confidence among consumers in the economy and their own financial prospects. A significant portion of the wealth of most Chinese citizens is invested in real estate. With realty prices falling and several housing projects incomplete, the crisis in consumer confidence could be a dampner in China’s economic recovery.
Deflation also signals over-capacity across industries. The combination of too little demand chasing too much supply could take years to rebalance, especially if the cash crunch among developers keeps the real estate sector in a prolonged downturn.
Despite economic reverses, China has doubled down on spreading its influence globally. United States agencies report that cyber attacks by state-backed Chinese hackers have intensified as the US presidential election draws near. It was revealed recently that China has spent over $2 billion in grants to US universities to gain influence with US-based academics. Chinese nationals now occupy senior positions in virtually every United Nations agency, ranging from the UN High Commissioner for Refugees (UNHCR) to the Food and Agriculture Organisation (FAO).
China is using its hard and soft power to position the country as the world’s leading superpower, supplanting the US by 2049, the centenary of the founding of the People’s Republic of China (PRC).
That goal could look utopian unless Beijing gets its economy moving from sprouting green shoots to achieving sustainable growth.
