Trade War

Newsletter 161 - April 23, 2023

Welcome to the 161st edition of Trade War.

China reports strong first quarter GDP but weaknesses remain including lackluster investment by private firms. Along with high youth unemployment, elderly migrant workers are also struggling with joblessness and sluggish income growth.

Local governments face Covid indebtedness. And party mantra that credits Xi Jinping for everything is a two-edged sword.

Treasury Secretary Janet Yellen stresses importance of national security and human rights in economic relationship with China but also warns that decoupling would be "disastrous.” Trade tensions keep growing but China responds with surgical retaliation. And Elon Musk removes state-affiliated labels from Russian and Chinese media on Twitter.

And a new survey by Australia’s Lowy Institute finds that the U.S. is falling behind China in Southeast Asia in multiple measures of influence, including economic, defense, diplomatic, and in cultural sway.

Strong GDP but rebound ‘not yet solid’

China’s first quarter GDP beat expectations, growing 4.5 percent, versus the 4 percent expected by most economists, and expanded at its fastest pace in a year, sparking optimism about the country’s post-covid recovery.

Also strong were March retail sales which surged 10.6 percent, well over the 7.5 percent predicted, a welcome sign that the economy is moving towards more reliance on household spending, a longtime priority of policymakers.

On the less optimistic side of the ledger, both industrial output and fixed asset investment missed projections (the latter rose by 5.1 percent, below the 5.7 percent expected), and while overall urban unemployment fell from 5.6 percent in February to 5.3 percent in March, youth urban unemployment reached 19.6 percent, near a record high.

With a “complicated international environment” and insufficient domestic demand, the economic rebound is “not yet solid,” warned National Bureau of Statistics spokesman Fu Linghui.

Digging deeper, another key takeaway:

‘Scar from Covid’

“On the surface, China’s lower than expected fixed-asset investment does not match with the record credit expansion in the last quarter. Where did the money go?” asks Zheng Wu, of Bloomberg’s Chinese language team.

“Think about the 22.9 percent drop in the latest industrial profit, the worst reading since 2020. Businesses need to plug the holes of operating cashflow before they could invest heavily as the government directs. In short, the scar from Covid does not go away overnight.”

Private firm investment barely budges

A breakdown of investment reveals further weaknesses. While investment by state-owned companies grew a strong 10 percent in the first quarter, that by private firms barely budged, up just 0.6 percent.

Apparently the years of crackdowns on China’s big private tech firms—plus the economic toll of three years of Covid Zero—is still weighing heavily on business confidence.

Elderly workers face job struggle

“[We are seeing] the transition in the workforce and available jobs from construction and manufacturing to more and more service jobs—more migrant workers are actually working in service industries, like working in restaurants, or delivering food to people’s homes in Beijing and Shanghai,” says the author of this newsletter in an interview with VOA Chinese.

“But those jobs may not be that easy to get if you are over 60 years old, so a ban of this kind [on elderly working on construction sites] has to lead to more unemployment for these 60-plus year-old workers. We are seeing higher unemployment rates for migrant workers. We are also seeing less wage growth. So income levels have not done very well for migrant workers in general and certainly not for elderly migrant workers.“

Here is the text version of the story in Chinese.

Covid-related local gov’t indebtedness

“One issue here is the Covid-related indebtedness of local government, which has, in the past, played an important role in driving the economy. It remains to be seen whether local authorities still have the resources to create enough jobs,” notes a commentary by the editorial team of the South China Morning Post.

“The figures leave a big question unanswered—whether apparent recovery is solidly founded and sustainable, or still rests on a fragile footing,” warns the post.

Remember how cash-strapped local governments were already turning to the use of arbitrary fees and penalties including traffic tickets to try to cover costs back in September of 2022? (Trade War, Newsletter 132 - September 18, 2022)

‘With Xi Jinping as the core’