Carlos Aquino, Director of CEAS
China is facing
several challenges amid uncertainties surrounding the world economy and
politics. Among them are the world post COVID 19 pandemics, the war in Europe
and the increasing in intensity by the United State of its competition and technological
war against China. But China also faces several challenges from within. How
will these affect the Chinese economy and how will impact Latin America and
Peru?
I.
Challenges
facing China from uncertainties in the world economy and politics
As the economy
began to recover from the COVID-19 pandemics in 2021, the demand for several
commodities began rising. The increase in the price of energy and food for
example began pushing inflation in many countries so central banks began
increasing its interest rate (the rates also began increasing as banks began reducing
the abundant money supply that they pumped to help their economies severely
affected by the COVID 19 pandemics).
But in February
2022 Russia invaded Ukraine and the price of energy and food increased even
more. Inflation achieved record levels not seen in more than 30 or 40 years, in
many countries, as in US and Europe for example, and this pushed central banks
to raise even more its interest rate. Only in this year alone, specially from
march, rates have increased in a very short time sharply. See Table 1.
Table 1.
Source: Asia
Nikkei https://asia.nikkei.com/Economy/Indonesia-hikes-key-interest-rate-to-4.75-highest-in-over-2-years
Besides inflation,
that have caused suffering to people in many countries, the rise of US Federal Reserve
interest rates has strengthened the value of the dollar, complicating matters
for the whole world. Devaluation of currency have made for example import bills
more expensive, and capital flights from developing countries have accelerated,
besides making the payment of their external debt heavier.
All these events
will slow down the growth of the world economy. See Table 2. And for China,
where international trade is an important factor in its economy, this will
impact it negatively. In March this year, China expected to grow 5.5% this
year, probably will grow only 3.2% according to a recent publication by the
IMF. But another event could severely affect the Chinese economy: the increase
in the intensity of the technological competition with the United States.
Table 2.
The Biden
administration is decided to impede or at least slowdown the growth of Chinese domestic
semiconductor sector. In its National Security Strategy unveiled this October 2022, The White House
states that “In
the contest for the future of our world, my Administration is clear-eyed about
the scope and seriousness of this challenge. The People’s Republic of China
harbors the intention and, increasingly, the capacity to reshape the
international order in favor of one that tilts the global playing field to its
benefit, even as the United States remains committed to managing the
competition between our countries responsibly”.
“The
PRC, …, is the only competitor with both the intent to reshape the
international order and, increasingly, the economic, diplomatic, military, and
technological power to advance that objective.”[1]
In
this context the Biden Administration has singled the semiconductor industry as
a vital area where US must be competitive and deny China the capacity to build
its own semiconductor industry. Besides enacting the CHIPS and Science Act last
august, two weeks ago the US prohibited not only the sale to China of advanced
semiconductors used for supercomputers and AI but also has forbidden US citizen
to work in the Chinese semiconductor sector. Semiconductors are vital to nearly
every industrial product, form computers to fighter jets, and are considered
the brain of a product.[2]
II.
Challenges
facing China from within
China
faces challenges related to its economy of two kinds. Ones are structural, and
the others arising in the last years.
a.
Regarding the structural issues facing the China economy, some can be
mentioned, among others: those affecting the real estate sector and financial
sector, the income inequality, the decrease in population, the need to achieve
technological self-sufficiency, etc.
Regarding
the problems in the real estate sector, these are: Dependence in the
sale of land for their revenues by local governments, lack of investment
alternatives (low interest rates and of investing opportunities abroad), no
property tax, etc. “In China, land sales refer to local governments' leasing
of land parcels to companies for a period of years. They are essential to
regional economies for two reasons. First, land sales accounted for about 41.6%
of their revenue in 2021, a share that would increase if taxes generated from
the land were also considered.
Second, local government financing vehicles (LGFVs) -- a group of
state-owned enterprises (SOE) mainly used to fund infrastructure and public
welfare projects -- use land value as collateral to borrow from financial
institutions”.[3]
Local governments have an incentive to sale land, and this have fuelled
investment in the real estate sector, leading to a bubble. Banks also financed these
operations with not much oversight. Also, there are vested interests that
oppose a property tax. People keep buying homes as a way of investment and
those become expensive and unaffordable to many people.
Though actually, under a sluggish economy and after measures taken from
the year 2020 to rein in the loose financing for real state companies, prices
of real estate assets have been decreasing. The problems of the real estate
sector is huge and its impact in Chinese economy also, as it is estimated that
the real estate and related industries account for around 30% of China GDP. The
case of Evergrande is an example of the problems in this sector.[4]
Graph 1.
Source:
Financial times https://www.ft.com/content/13476bf7-a519-427c-afd8-06e5579539d8
Even
if in the last ten years it sems income inequality measured by the Gini
index have been decreasing, many people cannot afford buy a house, or send its
children to good schools, or earn enough to cover its necessities. And this
phenomenon explains also why less children are being born and population
will soon begin to decrease in China. This will have serious consequences
for China economy, among others, the shrinking of the labor force and the rapid
ageing of the population (and the need for more pension to paid).
In
2015 China launched the “Made in China 2025” initiative and have been
making advances to fulfill the objectives, but it seems difficult to achieve
the aim of having 70% of self-sufficiency in core materials (parts and
components) in 10 key industries. As was said China wants to achieve technological
independence, but specially in the semiconductor sector it is facing severe
restrictions from the United States.
And
the U.S. is enlisting the cooperation of other countries and economies to
exclude China from the supply chains needed to produce these semiconductors. It
is forming the so-called Chip 4 Alliance, with Japan, South Korea, and Taiwan,
and among them it is said they control most of the design, machinery, basic
materials and production in the industry, and aim to deny China the ability to
produce advanced chips.[5]
b.
In the other hand, the challenges arising in the last years are the maintenance of a
strict zero COVID policy, the efforts to achieve common prosperity, among others.
Regarding the
strict zero Covid strategy, this is seen as one that have avoided China
to have many casualties as seen in other countries, but after nearly three
years as the rest of world have enter normality with no restrictions to daily
live, China still is keeping restrictions. And this is affecting its economy.
The idea to
achieve common prosperity is in line with the fulfillment of the “Chinese
dream” exposed by President Xi Jinping. To confront the high prices of homes,
an aspect of Xi policy, he said “housing is for living, not speculation”. But
there are challenges for the application of this strategy.
III.
Opportunities for Latin America and Peru
The
increase in the size the middle class in China if it achieves "common
prosperity" will be good for the region. This have been reiterated in the
20th National Congress of the Communist Party of China that recently have
finished. China independent development of its technological sector offer also
opportunities for Latin America.
But
the most pressing thing is for the China economy to grow, because in this way
it will help the rest of the world including Latin America and Peru. China is
the engine of the world economy, and more than half of the countries of the
world have China as their main trade partner, or main source of imports, or
destination for their exports.
March 24, 2022
[1] The White House: NSS, https://www.whitehouse.gov/wp-content/uploads/2022/10/Biden-Harris-Administrations-National-Security-Strategy-10.2022.pdf
[2] Carlos Aquino: https://www.slideshare.net/carlosalbertoaquinorodriguez/chinaunited-states-competition-and-the-chip-4-alliance
[3] Nikkei Asia https://asia.nikkei.com/Spotlight/Caixin/China-s-plunging-land-sales-threaten-local-governments#:~:text=In%20China%2C%20land%20sales%20refer,the%20land%20were%20also%20considered.
[4] Financial Times: https://www.ft.com/content/13476bf7-a519-427c-afd8-06e5579539d8
