MELBOURNE: Optimists of a post-COVID-19 economic recovery hope that Beijing will summon a massive infrastructure stimulus, triggering a commodity boom, as happened after the global financial crisis in 2009.
China’s emergence from the pandemic has been slower than expected, with some public health controls becoming institutionalised, and with second-order economic effects being felt via lost export orders and jobs.
Life is returning to normal in most provinces, but strict neighbourhood-level monitoring, testing, and social distancing remain in place. China can’t relax fully while the virus is still spreading internationally.
New locally transmitted cases are still being reported, so school openings have been postponed, and cinemas closed again after briefly reopening.
China business analysts Gavekal Dragonomics say that two-thirds of people are back in workplaces, but most still can’t obtain door-to-door deliveries, only half have visited a shopping mall this month, and all must still quarantine if travelling beyond their city of residence, and again on return.
Gross Domestic Product (GDP) fell 6.8 per cent in the first quarter. The IMF is forecasting a recovery only to 1.2 per cent growth for all 2020. Exports – which comprise about 18 per cent of GDP – are expected to fall by up to half in the first quarter, and industrial profits by 25 per cent in the first half.
Last year, government debt grew faster than in a decade, since the post-global financial crisis (GFC) stimulus kicked in.
At the start of 2019, total Chinese debt was about US$40 trillion – 304 per cent of GDP and 15 per cent of total global debt.
China had started a deleveraging campaign, but the US trade war halted it.
Thus, credit limits had been eased again, and local governments were allowed to issue special-purpose bonds – chiefly for infrastructure.
But such stimulus programmes have achieved ever-diminishing productivity gains, and the misallocated investment has become vast – a quarter of urban apartments now stand empty.
And Chinese financial institutions, led by China Development Bank and China Export-Import Bank, have provided massive capital for Belt and Road Initiative projects, funded almost entirely by loans.
The capacity to repay – certainly, within the schedule agreed – must now surely come under question, thereby limiting such institutions’ future stimulus roles.
NEW SOURCES OF GROWTH
So where will Beijing turn to restore growth?
Some clarity came at the postponed National People’s Congress, where Premier Li Keqiang delivered the government’s “work report”. More will come when the 14th Five-Year Plan is launched early next year.
While infrastructure stimulus remains China’s first line of response to economic emergencies, the government insists that this time the new public works will be different.
Dan Wang of Gavekal says Beijing is promising a boost in “new infrastructure” – including artificial intelligence and big data, but with the 5G mobile network the main priority.
“All that’s missing,” says Wang, “are good reasons for consumers to actually use 5G. For now, it remains a solution looking for a problem: it boasts faster speeds, higher data flow and more device connections, but current 4G speeds are enough to satisfy consumer needs.”
This 5G push is therefore likely to disappoint as a near-term stimulus policy, he says.
The China-US trade war may also reignite.
A clause allows for fresh negotiations “in the event of a natural disaster or other unforeseen event” – which China could invoke as it is required to buy US$200 billion of new US energy and agricultural products, a great challenge in this collapsed economic climate.
Otherwise, trends already underway before the pandemic may resume, some more intensely.
Accelerated by the trade war, companies from Japan, South Korea, and Taiwan had already begun to restructure the great Asian value chains, investing more both at home and in third countries such as Vietnam and Indonesia, to lessen risks associated with over-dependence on China, including Beijing’s propensity to prioritise politics over economics.
The withdrawal of the massive South Korean chaebol Lotte from China, where it had invested A$10 billion (US$6.5 billion), in the face of Chinese sanctions over new Korean missile defence, provided a stark example.
Robotification is another trend likely to accelerate post-pandemic. And market analysts China Skinny say that China’s online and offline retail is becoming dominated by a handful of large tech companies.
PLENTY OF SPARKLE STILL IN THE CHINESE MARKET
China’s middle class is likely to resume, whatever Beijing thinks, its search for overseas havens, via property purchase, business development, and, or student education.
As an example, Australia invests little directly in China – its US$13.5 billion is a billion less than it has invested in Papua New Guinea.
But a quarter of imports come from China, and a third of exports go there – three quarters comprising just four commodities: iron ore, gas, coal, and gold.
Quantities are holding steady. Income from Chinese students in the last financial year was US$12 billion, and from Chinese tourists US$4 billion. Obviously, these revenues will fall.
Business commentator Alan Kohler wrote recently in The Australian that: “For Australian businesses that have China as their plan A, they should start thinking about plan B.”
A degree of international decoupling is indeed inevitable in the wake of the virus, when China’s economic growth will continue to slow. Firms that have focused their international planning chiefly on a country’s – especially China’s – GDP growth may need to think again.
But that doesn’t mean junking plan A.
The Chinese market will remain massive and will continue to reward those who can build and keep good relationships, and who pay close attention to its constant changes, especially to its multi-layered politics.
Rowan Callick is an Industry Fellow at Griffith University's Asia Institute and a member of the Advisory Boards of the National Foundation for Australia China Relations, La Trobe University’s Asia Institute and its China Studies Department, and the University of Technology Sydney’s Australia China Relations Institute. This commentary first appeared on Lowy Institute's blog The Interpreter. Read it here.