27 October 2022

Where next for China’s economy?


Compare and contrast two very different economies. One is a free market economy struggling with chaotic politics triggering market instability, price volatility and rising uncertainty. The other has, arguably, the most stable politics on the planet but is also seeing its markets tumble and currency fall as government decisions panic investors.

Both illustrate the critical importance investors ascribe to ‘politics’ as a factor of a nation’s economic success.

Yet, the UK and China are very different stories. The markets just brought down a Conservative government because it was seen as naïve, ideologically driven, and deaf to the negative consequences for the economy and UK growth it was likely to trigger.

China stocks and the Renminbi have also crashed – yet the Chinese Communist Party (CCP) is not in the least bit concerned by what markets think. It is studiously ignoring a major sell-off by global investors who now see China trading future growth for the party’s security. The collapse in Hong Kong and US-listed Chinese shares didn’t make the front pages of any the Chinese papers, according to Bloomberg. 

This year foreign China stocks are down between a third and half. President Xi talks about engagement with the global economy, but the country he leads is now focused on internal self-sufficiency, innovating its own tech base, and effectively preparing the economy for a showdown with the USA. Covid restrictions have caused the economy to tank but come with the added advantage of effectively closing out external visitors, meaning we have little on-the-ground intelligence on the actual state of the economy.

Harry Hindsight is the greatest trader I have ever met. I wish I’d asked him before I piled into China years ago. I judged it a cheap opportunity to get into the globe’s economic powerhouse without understanding just how the economy and politics worked. A big and costly mistake. I’ve learnt some lessons.

The first is that timing is everything. I bought well before the leadership of the CCP decided to crush entrepreneurs by taking tech companies into de facto government control. I put my money down pre-Covid, before Hong Kong was effectively annexed, and ahead of the growing tension with Taiwan.

I made my investment decision based on the thesis China was on the verge of fundamental change and global engagement. I expected its explosive growth to continue as it blossomed into a relatively open and wealthy Asian consumer society under a security-conscious regime.

Instead, under Xi, it’s becoming a closed autocracy. The home of surveillance communism successfully monitoring every aspect of citizens’ lives. As a result, the party can worry less about keeping workers happy.

After securing an unprecedented third term, Xi now appears omnipotent. The spectacle of former President Hu Jintao being bundled out of the Hall of the People was a clear sign of Xi’s absolutism. It was a telling moment.

Trying to figure out where China goes next is a tough one. There are plenty of reasons to suspect the worse, but if you’d looked at China 50 years ago, there were very few reasons to expect it would become the World’s largest economy and take so many people out of rural poverty. Will it surprise us again, or does Xi represent the end of the line for China’s economic miracle?

The best way to consider China is in relation to the economic history of other autocracies. There is no doubt the policy of encouraging private industry within a matrix defined by the state worked extraordinarily well for China. They are, after all, a nation of traders if not a trading nation. They beat the West for 20 years by being ‘cheapest to produce’, undercutting western production by exporting price deflation on every conceivable manufactured item.

But does China have the imagination, invention and innovative skills to shift its economy from being a price taker at the lowest level to a price setter, exporting new and unique goods and services? The jury is out on that one.

I suspect China will quickly discover its new autocratic economy can’t deliver the innovation it needs. That requires uniting the nation in a common cause against a common enemy. That explains the Taiwan and anti-US rhetoric. 

My friend, David Murrin, eco-historian and futureologist, has defined the great codes embedded in history. His Five Stages of Empire looks at how wealth creation builds economies, while wealth distribution weakens the underlying economic system. The Roman Republic is a template. Before the Empire was established under Augustus, individuals rose by their successful pursuit of ‘imperium’. If a general won a new province of the empire, if a jurist was sufficiently skilled, or a politician was exceptionally devious, they could rise to become Consul – de facto ruler of Rome. Until Augustus, Rome’s story was one of constant expansion of its borders. After Augustus, the Empire was about protecting the ruling class and defending his borders. Innovation, expansion and opportunities declined.

This pattern of optimistic expansionary phases, during which a nation builds a sense of pride and collective purpose, followed by pessimistic, contractionary phases where the social fabric fragments, still broadly holds up today.

But what is really surprising is where China fits into this. Demographers have pointed out, the consequences of single-child policies have caused a massive shortage of women, and a crashing birthrate leading to the adage China has got old before it got rich

China’s prospects of an all-encompassing global trading empire based on belt and road infrastructure serving Chinese industry now look tested.

Whatever happens, the risk is the new China becomes a destablising global issue, especially in Asia.

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Bill Blain is market strategist and head of alternative assets at Shard Capital.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.