China and the World—A New Trajectory? A Report from the 2023 Bund Summit

Last week, I attended the 2023 Bund Summit, (Financial leaders to explore global growth at 2023 Bund Summit - CGTN) a key conference of economists and financial managers in China that featured prominent speakers, including former US Secretary of State Henry Kissinger, the Executive Vice President of the European Commission Valdis Dombrovskis, the First Deputy Managing Director of the International Monetary Fund Gita Gopinath, and Axel A. Weber, Germany’s previous Central Bank President.

I was deeply impressed by the dialogue between Henry Kissinger and Qian Yingyi, President of the Shanghai Finance Institute. I was amazed by the clarity with which Kissinger spoke about artificial intelligence (AI) as a key game changer for societies, a challenge for regulators and international bodies, and a threat to mankind itself. It’s a topic I need to study more, and I will share my thoughts soon.

The key focus nevertheless was not AI. At this summit, leading economists, scholars, and think tank representatives came together from the US, Europe, and China to discuss the global economy’s state of affairs. Not surprisingly, as the Bund Summit is held in China, the Chinese economy’s current situation and impact on the global economy received special attention.

Current State of the Chinese Economy

There is no doubt that views of the Chinese economy differ—not only did these differ between economists from the US and China, but within the different circles, there was quite a variety of opinions. Nevertheless, a few pertinent themes are widely recognized.

1.)??? Cyclical downward trend in the economy

Most economists agree that China is experiencing a cyclical downturn with lower GDP growth rates. While the average growth rate from 2014–2018 was above 6%, it fell to below 6% in 2019 and is estimated to be 5.6% in 2023 and 4.6% in 2024 CEU-June-2023-EN.pdf (worldbank.org). China is therefore facing what many economists have predicted for many years –cyclical lower growth that could lead to a soft landing. Still, as many Chinese economists note, China was the only large economy in the world that got through the Covid years of 2020–2022 without a shrinking GDP. Its economy grew in those years.

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2.)??? Structural problems

China is trying to move production from low-end to high-end products and at the same time move away from purely export-driven economic growth to consumption-based growth. However, domestic consumption is not picking up at the speed the Government wishes to see. A second issue is the economy’s over-reliance on property markets. Prices have grown so much that a property bubble was created. Now, property prices are falling rapidly, construction of apartments has come to a near standstill, and floor space sales have dropped sharply. The government will not have enough funds to jump in as a spender of last resort with public infrastructure investment.

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3.)??? Risk of “Japanification” of the economy

Many economists fear that China could be hit with the same fate as Japan at the beginning of the 1990s by a phenomenon called balance sheet recession. As Richard Koo, who created this term, explained at the Bund Summit, it means that companies and private households alike start saving money and reducing debt at the same time, as they do not believe in positive economic developments or a further rise in real estate prices. While they still have cash flow and are not bankrupt, they reduce their debt every year, meaning that this money is no longer available for the banks to lend for investments. This leads to sustained slow or negative economic growth—in Japan, it took decades to recover from this balance sheet regression.

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4.)??? Geopolitical risks

Geopolitically, what started with spiraling tariffs on US–China trade has become a much more severe level of measures by the US to limit China’s access to high-end technology. This has not only led to significant problems in the Chinese IT industry but also to a situation in which Chinese tech companies are doubling down in their efforts to become independent from foreign IT, in particular, foreign-built chip sets. Huawei’s latest mobile phone, the Mate 60 Pro, has left international industry experts puzzling how the new 5G Kirin 9000s processor developed specifically for Huawei could have been produced fully self-sufficiently. That said, geopolitical risks, according to the summit analysts, are here to stay, whether escalating conflicts between the US and China or in the South China Sea.

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5.)??? Mixed policy response

There is much debate among economists about whether the U.S. Federal Reserve Bank’s response to the emerging crisis for two years was too strong or whether China’s fiscal and monetary response during the Covid years and in 2023 was too careful. The fact of the matter is that we see in Western capital markets the exact opposite phenomenon to that in China. Whereas in the US and most of Europe, central banks have increased interest rates sharply, in China, the People's Bank of China lowered the interest rates to 2.45% in August 2023—a low of the last 20 years.

China’s Economy at a Crossroads

Looking at China’s economy, one can find good arguments for many scenarios, such as dwindling growth rates ending in a so-called hard landing of China’s previous growth model. This scenario could be triggered by a complete collapse of the housing market, where measures put in place (interest rate cuts and restructuring of failing real estate companies) would not work. Local governments could not come to the rescue of the sector, as their pockets are empty since they too began borrowing during the 2008 crisis to build infrastructure, meanwhile accumulating estimated $9 trillion of off-balance sheet debt. In addition, Covid tests in 2022 cost local governments further billions of dollars. Given that the housing market represents nearly one-quarter of China’s GDP, according to a Harvard study (Microsoft Word - The Size of China's Real Estate Sector Jan 20 (harvard.edu), a crash in this sector would have a massive ripple effect on the economy and might push the whole economy into recession. This would lead to further reduced foreign direct investment (FDI) and deal a further blow to industries once highly dependent on FDI for their development.

But—other, much more optimistic scenarios for the Chinese economy exist. Stronger monetary and fiscal policy responses would have a positive effect and regain foreign investors’ trust in further growth. To continue to support exports, the Chinese government is actively seeking and developing international cooperation to expand product markets through regional (e.g., Regional Comprehensive Economic Partnerships; RCEPs) and international alliances (BRICS). At the same time, China is trying to find a holistic approach to the property sector by stabilizing the large property firms and recreating trust within households that their savings into real estate are safe. Also, AI—a technology for which both China and the US share the world’s leading position—could help create a Schumpeterian productivity jump in China, helping industry to regain competitiveness. Flanked by a reduction in geopolitical tensions (e.g., through joint global efforts to combat climate change or to govern AI that would rebuild trust among governments), global institutions like the World Trade Organization (WTO) would also be strengthened. In this scenario, China would remain a growth engine of the world and move forward by sharing its wealth and innovations toward a multilateral, peaceful world that is the basis of a global growth scenario that also reduces inequalities.

Shanghai is the home of the Bund Summit and symbolizes in many ways the dynamics of China’s industry and foreign trade. Due to its unique geographical position, with the Yangtze River, one of China's major rivers, at its back and facing the Pacific Ocean, Shanghai has played a major role in China’s integration into the global economy throughout the last 100 years. The Bund symbolizes Shanghai’s prosperity, so it was symbolic to discuss China’s future economic development on the Bund.

Closing Thoughts

Regardless of the rise and fall of world powers, the Huangpu River has been flowing quietly along the Bund for thousands of years. Personally, I believe in the continuation of long-term trends, and while we could sit at one of the Bund’s coffee shops and wait and see where China's economy will go in the future, I am personally of the opinion that one can deepen one’s understanding of economic developments by listening to and having discussions influential economists from China and abroad. As John Maynard Keynes famously said, “In the long run we are all dead,” meaning that if we do nothing (and he was specifically referring to the government not intervening), it will take a very long time for an economy to recover. Thus, there is some hope for the Chinese economy that recent measures will provide the much-needed stimulus to get the growth story back on track.

#globalization #Sinogerman #economy #cooperation

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