Bloomberg economists Tom Orlik and Bjorn van Roye have measured the impact of US-China decoupling. Journalist Wang Jian reacts to these estimates and recalls the Chinese response’s difficulties, the domestic cycle.
The decoupling scenario 脱钩 from economists
A complete decoupling could lead to a decline in growth to 3.5% in 2030, compared to a forecast of 4.5%, which considered the relationships unchanged.
Decoupling, synonymous with the end of trade and technology flows, which stimulate growth, will have a more substantial impact on China than on the United States because China benefits more from international trade and innovation. American growth should be slightly impacted. Economists expect 1.4% in 2030, compared to 1.6% previously.
In this scenario, China’s productivity growth will slow down, and capital spending will weaken as technology transfers come to a halt. The results will not be catastrophic because the country has sharply narrowed the technology gap with advanced economies over the last 20 years. Increased funding for research and development and stronger linkages with advanced economies could offset the effects of decoupling. On the other hand, the results could be more severe if the United States successfully brought its allies into decoupling, such as Korea, Japan, France, and Germany.
The importance of the 6% threshold
Wang Jian reminds that the passage of the growth under 6% will not make it possible to mitigate the country’s structural problems. The strong growth compensated for the shortcomings. With “low” relative growth, for example, the hole in social protection will not be sustainable; the government invested little in this area for various reasons: it preferred to put capital elsewhere and respond to other interests. Real estate bubbles and local debt will pose serious difficulties.
Domestic consumption
To rely on the domestic market to face the next few years is the age-old Chinese consumption problem.
When Prime Minister Li Keqiang recalled that 600 million people had an income of 1,000 yuan (140 USD) per month, he was basing his remarks on figures that showed that 70% of the population did not exceed 2,000 yuan per month. Under these conditions, consumption will not be the economic engine. Figures for the second quarter indicate that consumption is lagging behind and that investment, especially in infrastructure, has driven up growth.
Wang Jian estimates the parallel/grey economy (灰色经济) at 30%. Its importance differs by region. In general, the higher you go in the North, the more critical it is. It cannot have a significant weight in consumption.
Investments
The contribution to the growth of investment is + 156%, that of import-export is +16.6%, while consumption has a negative contribution of … 73%. This fall in consumption is, of course, linked to the epidemic. Will it be able to recover?
These investments have been fueled by the issuance of special bonds following the epidemic. Astronomical new debts have been created.
In recent years, the government had placed its hopes on the national market. It is normal; the consumption figures presented a better picture. In 2019, it positively contributed to the growth of 57.8%, much higher than investments at 31.2%. It will be necessary to reverse the trend so that the national market presents a robust counterpart to the decoupling. Is it possible? Not immediately!
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9 September 2020