China’s Economy: Dragon in Turbulence

Chinese President Xi Jinping has been confirmed for a third five-year term as leader of the Chinese Communist Party (CCP) by the country’s military. While the appointment of Xi and his new leadership team went smoothly during a a week-long meeting of 2,300 CCP delegates in Beijing, the same cannot be said for China’s economy: The once-high-flying dragon is entering a period of turmoil. And, when the dust settles, the world’s trade and political system may look very different.

The increasing number of economic indicators in the red shows the depth of China’s problems. The economy grew by 0.4 percent in the second quarter of 2022, the slowest pace since the peak of the early 1990s except for Q1 2020, when Covid-19 started. The third party saw an additional growth of 3.9 percentbut it took average growth for the year to date to just 3.0 percent, below the 5.5 percent targeted by the Xi administration and the 3.2 percent forecast by the International Monetary Fund.

The middle ground is equally calm. The IMF expects China’s economy to grow by 4.4 percent in 2023, down from the >5 percent rate needed to meet Xi’s goal of doubling GDP by 2035. The World Bank’s forecast is particularly bleak.

Three groups are responsible for bringing the dragon to the world: the zero-Covid policy that is disrupting the economy, a damage in the property sector, which makes up 30 percent of China’s GDP and sweeps disrupting Big Tech. Interestingly, they are all self-inflicted. If the advanced economies go under, China will see more growth.

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Meanwhile, Beijing has something to contend with: Washington new export controls for advanced semiconductorsthe “brain” of electronic devices used in everything from healthcare to the military.

A conversational chip

In October, US President Joe Biden’s administration announced the ban selling high-end chips in China by American and foreign companies that use American machines or know-how. The order also prohibits US citizens and green card holders from working in Chinese semiconductor companies. Hundreds of managers and engineers, among them former employees of the Dutch giant ASML, quit their jobs within days, halting semiconductor operations. A One shot fired by Biden has done more damage to China than four years of “disruption” under Trump.

The chip industry relies on a complex and interconnected world that draws expertise from different areas: design in the US, manufacturing in Taiwan and South Korea, equipment from the Netherlands and assembly, packaging and testing in China. Today, China is still limited to low levels of renewable energy.

Biden’s ban will encourage Beijing to accelerate its push towards self-sufficiency, not just in semiconductors but in all advanced manufacturing, as it has done. in nuclear and hydrogen bombs and satellite technology under the “Two Bombs, One Satellite” project in the 1960s.

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But many believe it will take China 30 years to achieve self-reliance. Even in this tough competition, the Chinese government can shoot itself in the foot. It has opened investigation of corruption against the chief executiveverse a a state-run investment fund that is a central plank in efforts to achieve “semiconductor freedom”. The investigation, which the government detailed, disrupted the sector and put the brakes on China’s advance in chip production.

Tit to tat

Biden’s economic war on China will have negative consequences for global trade. In the near future, they hope that China will reciprocate with their control over the most important products as a foreign country to the US. Some exports may go from the US to other countries, such as Brazil and corn. Beijing could go after Americans like Apple and Tesla who have large operations in China.

Over time, the two countries will pursue voluntary trade policies outside of the World Trade Organization, using carrots and sticks. The international order will be reshaped as Beijing and Washington escalate their conflict to allies, especially in Southeast Asia, and lock horns. Taiwan. Unfortunately, pragmatism and economic interests can take a back seat while idealism and anti-nationalism move forward.

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Even in the absence of external threats, China will have its work cut out for its internal challenges. A population of 1.4 billion is on the verge of extinction decrease in the first period in 60 years. At current trends nearly half of them will disappear by the year 2100. Fewer working-age people means fewer workers and fewer consumers, reflecting GDP growth.

The money that has helped China become a super-economy thanks to cheap labor is about to disappear, and Productivity growth is slowing to an average of 5.7 percent from 2014 to 2018, compared to 15.5 percent from 1995 to 2013.

But the biggest concern may be the CCP itself. Heavy parties – if they have good intentions – to try to end the epidemic, to achieve. common good (including concentration in the booming and profitable tech sector) and policies to stop the housing bubble have had dire consequences, which have created problems for the national economy.

What China lacks, for starters, is central control and reform of economic policies that work. Even Xi, whose rule will be unchallenged for years, needs a team that is competent and fearless to provide independent advice. Otherwise, prepare for a lot of chaos ahead.

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