Andrew Singer Talks About China

Vol. 3, Issue 11

Sep 26, 2024

China’s Economic Stories (Part II)

Today is Part II of III looking deeper and considering other sides of China’s economic story beyond what is often published in American media. Part I dealt with domestic migration and population. Part II looks at domestic investing.

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Shanghai (photo by denys-nevozhaibi-unsplash)

DOMESTIC INVESTING. Official China has long maintained that a robust industrial investment policy directed and championed by the government is the key to China’s prosperity. It is an essential part of twenty-first century China’s unique hybrid economic system — powerful State and private enterprises operating within a declared (if not at times aspirational) unitary command and control organizational structure.

Such a policy includes massive investments in infrastructure, from highspeed rail to highways, bridges, subways, and airports. It includes extensive research and development funding in high technology and other advanced fields, from semiconductors to AI, EV, 5G, and solar. And these industries are just the tips of several icebergs.

Finances are key, but so too is motivation:

In one money example, from January through July of this year, “China’s state-owned enterprises (SOEs) funneled more than 1 trillion yuan (US$141 billion) into strategic emerging hi-tech industries…amid Beijing’s push to support emerging industries in the face of US-led tech containment efforts.”1
Motivationally, a businessman visiting Guangdong Province’s Dongguan City wrote that “Today, mayors are assigned a set of specific KPIs [Key Performance Indicators], that include environmental, social, cultural and economic targets, leading to a more sustainable and purposeful development. Imagine working for China Inc. and getting your performance KPI, that's how their Meritocracy works.”2

Shidaowan nuclear power plant, Shandong Province (photo by Weibo CPNN. www.scmp.com)

Direct and directed central government investment, coupled with entrepreneurial zeal and unintended consequences of foreign sanctions, have succeeded in making China a world leader in several important industries, including solar panels (80% of global production), electric vehicles (60% of global sales and 2/3 of global public charging stations at present located in China), nuclear (construction of plants and development of new technology, power production), and shipbuilding (more than 50% of global output and 2/3 of new orders globally).

Many of these breakthroughs, which give China a global competitive advantage, have in turn led to growing sanctions and greater tension with countries from North America and Europe to South America and Southeast Asia. Chinese companies that face demoralized and moribund domestic demand are looking abroad to invest capital, build, and sell products and services. The fact that their offerings are often more advanced, more available, and a lot cheaper is a siren lure to citizens of Global North and South.

Ar Horqin Banner District, Inner Mongolia Map 1 (GIAHS Report, May 2022,

www.openknowledge.fao.org)

As for some of what ails the Chinese home front as a result of past policies, actions, and political intrigue,

Caixing Global in China recently reported that “Facing mounting debt, the Alukerqin Banner government in China’s Inner Mongolia has warned of impending credit defaults, saying it can barely pay for basic public services, staff salaries and operational expenses this year [due to hidden debt, limited revenue, and lack of financing channels].”3

On the other side of the country,

“Chinese local governments are desperately seeking new revenue streams by leveraging government-owned assets to address mounting debt pressures and dwindling coffers. A document from Bishan District in Chongqing, southwest China, went viral online, outlining the formation of a ‘Sell Everything to Save the Day’ task force aimed at monetizing state-owned assets.”4

Foreign direct investment continues to plummet in China as foreign firms pull back. IBM has closed shop in country and fired its employees.5 Apple has redirected increasing assets out of country and is now manufacturing (not just assembling) high-end phones in India.

There has been a quiet debate in some corners of China about the central government’s longstanding focus on promoting industrial supply creation and infrastructure by those who believe that “investing in human development”6 and providing stimulus should also be on the table.

The Chief Economist of Bank of China International Co. Ltd. has written that “…when the economy faces excess supply and insufficient demand, stimulus measures can boost output and employment without imposing significant costs in terms of inflation or balance of payments. It's important to note that while stimulus measures may indeed lead to higher government debt and accelerated monetary growth, these consequences do not undermine their sustainability.”7

In surprising news earlier this week, the Chinese government announced a significant stimulus package, not so much “investing in human development,” but certainly trying to buffer the headwinds pressing on various segments of China’s beleaguered economy. This mixture of rate cuts and policy easing includes decreasing the benchmark interest and mortgage rates, reducing lender reserve requirement ratios, and lowering second home mortgage down payment minimums, as well as establishing well-capitalized funds to spur institutional purchases of stocks, assist companies with share buybacks, and support local government-owned enterprises in buying unsold real estate inventory from property developers.8

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Part III will look at pricing and marketing the Chinese economy stories.

Andrew’s China Newsletter