By Sofia Smirnova
The most cautious forecasts on the dynamics of the development of the Chinese economy were confirmed for the worse. According to the Bureau of Statistics of China, in July 2023, industry grew by only 3.7% compared to the same period in 2022. According to forecasts, the value should have exceeded 4.4%. Retail sector showed growth by 2.5% (forecast - 3.2%). The automotive industry generally declined by 1.5%, although in June there was an increase (1.1%). Sales of clothing decreased to 2.3% in July compared to 6.9% in June, communications equipment - up to 3% compared to June 6.6%, building materials were sold less: -11.2% in July against -6.8% in June. And, for example, investments grew by only 3.4%, although 3.8% was predicted. Notably, the Chinese currency fell 0.3% to 7.25 yuan per dollar. What are the reasons for what is happening and how it can affect the Russian economy,
According to the script
Since 1978, China has been developing its own model of sustainable economic growth, and then endigenous development in the context of globalization, recalls Ninel Senyuk, Associate Professor of the Department of International Relations at the Faculty of World Economy and International Affairs at the National Research University Higher School of Economics.
— As a result, already in the first decade of the 21st century in the PRC, in several versions, an empirical five-factor model of institutionally managed economic development was worked out against the background of predominantly four-factor Western ones. This primarily explained the outstripping pace of development of the Chinese economy, as well as its investment expansion, which became especially noticeable during the global financial and economic crisis of 2007-2009 and in the subsequent period. This period sharply intensified the processes of globalization of the internal Chinese economy, at the same time exacerbating the issue of China's interest in the corresponding reorganization of the global (and, above all, the Eurasian) infrastructure.
According to the analyst this kind of "new globalization" violated the limits of elasticity of the factors of global equilibrium, for the time being compensated by the dominant participation of the West in the creation of high-tech added value.
“At the same time, by the middle of the last decade, the Chinese economy began to show signs of entering a phase of maturity, and there were clearly signs of the saturation of global market consumer demand. All this objectively aggravated competition in foreign markets, while at the same time requiring further institutional innovations at the fundamental level of the Chinese economic model. The situation worsened in connection with the election of US President Donald Trump, who, in response to the economic expansion of China, initiated the start of the US-China trade and tariff war in 2017–2018, which was subsequently supported by most developed economies. Together with the COVID-19 pandemic and the global lockdown, this contributed to the development of the reverse processes of deglobalization and divesting, which required additional significant costs (about 2% of GDP) to reduce production and technological chains and reconfigure GVC.
Closing under the flag of "zero tolerance" to the pandemic in the context of growing geopolitical tensions led to the transition of the Chinese economy to a new model of "double circulation", where the internal development circuit becomes the leading priority, and the external circuit becomes the supporting one:
“However, the crisis in the construction and real estate markets was the first sign of saturation of the growth factors of this model, which is the fundamental reason that determines the downward trend in Chinese economic dynamics,” continues the interlocutor of the publication. — In early February, leading investment banks including Barclays and UBS were optimistic about the yuan strengthening in 2023. They attributed this to the recovery of the economy after the lifting of anti-COVID restrictions, the growth of investment and the increase in net exports. However, despite their forecasts of 6.6-7 yuan per dollar by the end of the second quarter, the real rate has surpassed 7.2 yuan per dollar. This may be due to the slow investment dynamics and the weakness of global markets, which affects China's exports.
The environment is not conducive
It is obvious that the world economy is entering another crisis, comments Daniil Shulga, Associate Professor of the Department of International Relations and Humanitarian Cooperation of the Siberian Institute of Management of the RANEPA.
— In part, this can be explained by the consequences of the covid period, which in China was accompanied by strict quarantine measures. The Chinese leadership and business community hoped for a boom in domestic demand (which saved China in 2008), but at the moment this is not happening. On the contrary, sales of cars and means of communication in July saw a fall of 1.5% and 3%, respectively. As for the collapse in demand for building materials (11%), the Chinese practice of building real estate “for the future”, especially in the northern regions, which is completely unprofitable in the face of a falling market, probably played a role here. Naturally, there is no talk of a collapse of the Chinese economy, especially against the backdrop of a fairly stable position of the yuan, which, in turn, is partly due to the abandonment of the dollar in a number of international transactions.
From the point of view of the interlocutor of Izvestia, another reason for the slowdown is the difficulties in the international situation:
One of the possible consequences of the crisis is an increase in Beijing's efforts to unite the country.
In view of NATO's active assistance to Ukraine, the alliance is unlikely to be able to adequately support its island satellites, especially since officially both the United States and all EU countries recognize the principle of "one China", emphasizes Daniil Shulga.
deflation as a brake
In recent months, the Chinese economy has been experiencing difficulties, says Ekaterina Kosareva, managing partner of the VMT Consult analytical agency.
— Among the reasons we single out the growth of the debt burden and debt load. But these difficulties are temporary, and therefore not as serious as some experts believe.
Right now, the global economy as a whole is in turmoil.
“The situation affects individual countries in which there are not even obvious prerequisites for a recession,” she continues. - In June, inflation in China was fixed at zero, and in July it amounted to -0.3%, that is, it turned into deflation. This phenomenon indicates a general decline in sales and purchasing power. Mainly, partner countries and through them - the population.
This state of affairs will affect relations between China and the Russian Federation to a lesser extent.
On the rise
The entire world economy is undergoing a strong restructuring, which cannot but affect the world's largest exporter - China, says Artem Klyukin, an expert at IVA Partners Investment Company:
Among the reasons, the analyst identifies internal Chinese problems, in particular, the debt load of a number of large developers and the debts of the regions:
Nevertheless, we should not forget that the growth rate of the Chinese economy remains high.
“Plus 3.7% is an excellent indicator for any country, even without taking into account the fact that the Chinese economy is already the largest in the world, ” sums up Artem Klyukin.
Far from recession
The Chinese economy continues to slow down, says Yaroslav Kabakov, director of strategy at Finam Investment Company.
— Industrial production grew by 3.7% compared to last year, below the expected 4.4%. Retail sales increased by 2.5%, but fell short of growth forecasts of 4.5%, pointing to weaker domestic demand.
Chinese letter: trade turnover between Russia and China increased by 40%
What are the prospects for the development of economic relations
According to the expert, despite the risks of lower growth rates, the likelihood of a recession remains low:
— The cut in key interest rates in China for the second time in three months is aimed at a slow economic recovery. Despite this, there is instability in various sectors such as construction and investment, putting pressure on economic growth. Rate cuts, stimulus measures and support for the private sector could affect the value of the Chinese currency. The yuan may continue to decline due to the unstable economic situation.
A weak economic trend in China could have an impact on Russia, leading to a potential decline in exports and pressure on commodity prices, given that China is an important consumer of Russian goods:
— The Chinese economy is in a downtrend, and the decisions of the authorities, including rate cuts and stimulus measures, can support the situation to a limited extent. The impact on the Russian economy depends on the dynamics of Chinese demand for goods and raw materials, concludes Yaroslav Kabakov.
This aritcle originally appeared in Russian at iz.ru