China’s recovery might be a bit less than meets the eye
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The writer is head of emerging markets economics at Citi
Are all Chinese economic recoveries, like Tolstoy’s happy families, alike? Many observers these days seem to think so. The recent boom in metals prices, for example, reflects a confidence in the market that this year’s acceleration in China’s growth rate will cast the same benign shadow over the global economy as earlier big recoveries have done. But that may not be the case.
The big Chinese economic recoveries of the past decade or so have been characterised by two features above all: they have been stimulus-driven and investment-led. Large amounts of support via credit markets and local government off-balance sheet financing vehicles were all typically focused on supporting activity in infrastructure and real estate. Fiscal and monetary stimulus delivered a surge in investment spending.
This kind of pattern was most obviously apparent in the recovery that followed the financial crisis and the one that followed China’s slump of 2015. During those years, other big economies were not doing much in the way of investment themselves because of the post-crisis austerity policies after 2008 and the effects of the eurozone crisis thereafter. And so China’s investment spending played a huge role in shaping global trade and commodities demand.
China’s economic performance in 2023 will be different in the sense that this year’s acceleration in growth will overwhelmingly be just the result of the country ending its lockdown approach to managing the spread of Covid. So, the economy will enjoy what is probably best described as a spontaneous recovery (not stimulus-driven) which will see the biggest effects on services and consumption (and not investment).
Why will monetary and fiscal policy be playing a more or less neutral role? As far as fiscal policy goes, a big increase in China’s budget deficits is unlikely because one of the reasons for the reopening in the first place is that Beijing has become a bit more anxious about the stock of debt on the public sector balance sheet. It is almost as if the government wants the recovery to fix its balance sheet problem, rather than use its balance sheet to fix the economy’s problem.
Equally, further significant monetary stimulus is unlikely, since Chinese interest rates are already considerably lower than those in the US, raising the risk of further capital outflows if monetary policy is loosened much more.
Although there will not be as much of a pivot towards looser macroeconomic policy as in the past, there is a different kind of pivot taking place these days: one from ideology towards pragmatism. Beijing is clearly less focused — for the time being — on “common prosperity” or the “disorderly expansion of capital”. Chinese policymakers’ body language towards the private sector is warm these days, although the authorities’ attitude towards the property sector is still characterised by the slogan “houses are for living in, not for speculating on”.
So, hopes for a stimulus-driven, investment-led recovery are likely to be disappointed. More Chinese households going to restaurants and theme parks will have a lot less impact on other countries than more Chinese high-speed trains or apartment buildings would.
To put it more technically, the “marginal propensity to import” — the amount of each renminbi of spending that boosts other countries’ exports — is likely to be lower for Chinese services and consumer spending than it is for investment spending. That is especially true from other emerging economies.
One other feature of China’s reopening this year bears thinking about, namely its consequences for the balance of payments. While the opening of China’s borders obviously benefits the traditional recipients of the country’s tourism largesse, its current account surplus might disappear fast: tourists spent a net $220bn abroad in 2019, and the pent-up demand for foreign travel is likely to be high.
Equally high, though, will be the pent-up demand to park capital abroad. The opportunities that Chinese have had to diversify their wealth internationally have been pretty limited during the past three years. In that time, not only has the country’s property market lost its appeal as a reliable store of wealth, but the China-US interest rate differential has also turned sharply negative. All in all, the incentive to get money out will probably be strong, which is likely to inject some volatility into the performance of the renminbi.
For sure the world is a lot better off with a Chinese recovery than without one. But it is best not to assume that this one will be just like those that have gone before.