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The author is a geopolitical analyst at Gavekal Research
For investors focused on China, there have been some positive trends recently. China’s exports are starting to pick up, supporting economic growth despite a long-term real estate recession and sluggish consumption. Chinese policymakers may feel that their factory-led growth strategy is becoming vindicated.
However, broader important structural issues remain largely unresolved. Despite the government’s policy to bottom out the tanker real estate sector, it remains adamant about truly empowering consumers through financial transfers to households and reforms that strengthen public services and social security. What are you refusing?
Programs that encourage households to trade in durable goods, including cars, are disappointingly small and too prescriptive, and end up being a roundabout way to boost industrial production again. By doubling down on supply-side support, China could exacerbate domestic overcapacity and global trade tensions. The country’s leaders are willing to accept such risks because politics and geopolitics are more important than economics.
Perhaps Chinese officials have noted that strong support for household incomes has prepared many Western economies for post-pandemic recovery, but perhaps steroid demand has fueled inflation, resulting in voters He must have realized with a sense of alarm that he was stirring up discontent and populism.
The main political obsession of China’s ruling Communist Party is to avoid a repeat of the 1989 uprising. Large-scale protests erupted in part because of the soaring prices of essential goods. The causes of inflation at that time were unique and related to the transition to a more market economy. However, the fear of a recurrence remains a concern for the Chinese government. There is a Chinese proverb that says, “He who is bitten by a snake will flinch from the rope.”
More fundamentally, China’s political and economic system cannot tolerate the distribution of resources for personal consumption. A characteristic feature of such a system with Leninism at its core is the mobilization of resources for socio-economic transformation. China’s ruling class boasts that the regime has demonstrated the ability to “accumulate resources to accomplish great feats.” They believe that this ability has enabled China to modernize its infrastructure, accelerate industrialization, lift itself out of poverty, and perform the miracle of development.
Today, China’s rulers are faced with the challenges of consumer spending, including hollowing out industry, over-financialization, destabilizing booms and busts, social fragmentation, the spread of populism, and digital platforms with wealth and power that rival those of the nation-state. I see this as a warning about American capitalism, which is led by the US. Chinese President Xi Jinping prefers to mobilize resources to power the “real economy,” which in China is synonymous with manufacturing.
Manufacturing helps ensure self-sufficiency and has been highly valued by Chinese leaders since Mao Zedong. Mao’s successors relaxed that stereotype not because they became true converts to comparative advantage economics, but because they needed to attract Western capital and technology.
Unlike other industrialized countries, where companies tend to outsource traditional industries as they move up the value chain, China has never truly believed in cross-border division of labor. Chinese strategists have always issued ominous warnings that the “strategic opportunity” in which capitalist democracies are willing to share the fruits of trade and investment with rivals like China will eventually disappear. . They can now claim to have had the foresight as the United States and its allies restrict technology, investment and market access to Chinese companies.
Out of this fear, Beijing set out to build the world’s largest and most comprehensive industrial supply chain. Chinese policymakers boast that they run the only country in the world that produces in all sectors of the United Nations’ International Standard Industrial Classification.
The country’s industrial strategy aims to push Chinese manufacturers up the value chain to dominate the domestic market and expand global market share. Foreign competitors that cannot be defeated should be locked into China’s increasingly sophisticated and efficient supply chain.
Therefore, trade-in programs for cars and appliances make sense in China’s political economy. We need to allocate consumption stimulus to manufacturing. After all, the Communist Party should derive its legitimacy and power from the workers on the factory floor, and Mr. Xi aims to build a manufacturing powerhouse rather than a rich consumer society.
