China’s economy has suffered a plunge in the first half of 2022. But put into context, given its economic size, even a 5 per cent expansion of its economy is nearly equal to creating an economy the size of the Netherlands’, or one larger than Turkey’s. A slower growth rate on such a gigantic economic scale is inevitable.
While gloom abounds, China’s economic engine has hit a kerb, not a dead end, and there is still ample room to engineer an economic turnaround.
In the latest 10,000-participant economic rescue meeting presided by Premier Li Keqiang, he cautioned that “the current economic condition, at some levels, is worse than in early 2020 when Covid-19 freshly hit”.
China faces export decline and consumption fragility in 2022, exacerbated by the ongoing zero-Covid policy. Manufacturing capacity has mainly been disrupted under lockdowns, and consumption growth has nearly been stagnant, with millions of Chinese stuck at home.
But Mr Li also noted that China did not flood the market with liquidity during the pandemic, and as a result has escaped the inflation curse engulfing the West. China’s April consumer price index, a measure of the price of consumer goods and a marker of inflation, rose a mild 2.1 per cent and the Chinese Central Bank has enough policy space to lower interest rates if the economy commands it.
Trade, consumption and investment are commonly named the “three horse carriages of the Chinese economy”. It is unsurprising that China’s imminent economic rescue measures will centre on the third and last horse of the economy. In the meeting, Mr Li committed to an old-school Keynesian policy prescription: major investment in the country’s infrastructure.
In the more than 40 years since China began its reforms, its economy has hit speed bumps a few times, including in 1990, in 1998 following the Asian Financial Crisis and the Global Financial Crisis of 2008. Each time, China faced enormous domestic economic challenges. And each time, China fostered new growth impetus to the economy.
In the first two decades of the 21st century, investing in rural transportation, highways, high-speed rail and airports has been a sturdy pillar of China’s economic growth, particularly at difficult moments. This time is no different.
However, China faces a new dilemma in 2022. The challenge for China today is less whether it should invest in infrastructure but what infrastructure it should invest in that will best deliver the economic outcome needed for tomorrow. Not all types of infrastructure are equal when measured by growth potential.
But today, China’s economic challenges go beyond simple structural reasons. It faces two formidable economic risks in 2022: the side effects of the persistent zero-Covid policy and the tightened control of the private sector over the past year. Two sectors stand out as the primary casualties.
The real estate sector produces a fifth of China’s GDP. Real estate feeds into a large spectrum of industries, from raw materials, construction and banking to real estate services. The real estate sector has been suffering from the government policy claw-back from land sales and bank credits to imposed sales price caps and floors.
Since the surprising measures taken against China’s ride-hailing app Didi one day after its debut on the New York Stock Exchange, the country's most savvy entrepreneurs have responded swiftly by relocating stock offerings to Hong Kong and focusing on their core businesses. The antitrust regulations imposed on Chinese technology companies have caused layoffs among China’s nouveau tech elite class, who have grown comfortable living off of lucrative stock options. Over $1 trillion worth of market cap from big Chinese tech firms has dissipated at both the US and Hong Kong stock exchanges since then.
So what next? The solution to China's growth clearly lies in the technology realm – but think infrastructure, not unicorns. NDRC, the national economic planning body, has outlined an ambitious data and computing power national roadmap for the 2020s. The plan aims to transfer the wealth of data stored on servers on China’s east coast to the newly conceived data computing centres in the western part of the country. China’s west has thus far lagged in its development momentum; this move will not only tap into the rich renewable energy capacity there, but also give the region a unique unequivocal strength in the digital era.
China is clearly focusing on renewable energy infrastructure, budgeting nearly $10tn to expand capacity – a bold move that will fast track the renewable energy innovation cycle, reduce the cost and cement an inalienable centrality to the global supply chain for the energy transition. Over the coming decades, China will likely be the world’s largest electric vehicle producer, with a robust national EV infrastructure outlay. It currently holds the most significant global share in solar and wind energy supply chains.
By contrast, the American Build Back Better Act that would see the delivery of renewable energy infrastructure, including 50,000 charging stations across the US, was voted down by the Senate. While both China and the US realise the significance of investing in renewable energy infrastructure, China’s economic slowdown has provided the incentives to expand its own infrastructure massively while the US lags behind.
Within the decade, China will see its cloud computing capability significantly upgraded and its renewable energy market more affordable and accessible. A new economic model will emerge out of this crisis, making the current slowdown, ironically, worthwhile.