Welcome to the 171st edition of Trade War.
Surprise appointment of a new head of the central bank shows Chinese leadership’s concern over weak economy. And Bloomberg warns China’s GDP may never surpass that of the US (something I predicted in 2020.)
Lackluster spending during June dragon boat festival is further evidence of consumption woes. Chinese localities struggling to manage high debt loads and declining revenues are expected to cut social welfare benefits. And Foreign Affairs predicts China’s consumption-led growth goal is ‘doomed to fail.’
Xi Jinping and premier Li Qiang pledge support for market openness. But ban on prominent financial commentator shows Beijing’s proclivity for censorship over transparency.
And Notable/In depth:
Global supply chains are starting to move out of China
Influencer visit to fast fashion brand Shein faces swift backlash
And revisions to espionage law spook foreign journalists.
Shock promotion in Beijing
In a surprise move, Beijing has chosen a new party secretary for the central bank, reports the Wall Street Journal’s Keith Zhai.
Pan Gongsheng, currently a deputy governor, will also likely take the governor role at the People’s Bank of China, making him more powerful than his predecessor Yi Gang, who only held the non-party role. The party chief until Saturday was Guo Shuqing.
The 59-year-old Pan is a veteran of China’s financial industry who did postdoctoral research at Cambridge University and was a research fellow at Harvard University. He likely was chosen for his deep experience, including overseas, as China faces unprecedented challenges.
“China’s economy, grappling with slowing growth, soaring debt levels and an aging population, is at a critical juncture. The appointment of Pan, an economist with extensive experience, appears to signal a cautious stance from Beijing, as officials turn their attention toward stabilizing the economy after years of Covid-19 restrictions,” writes the Journal’s Zhai.
“Shock promotion in Beijing. Pan Gongsheng appointed party boss of the People's Bank of China after being dropped from the CCP Central Committee last October. My initial reaction is this suggests Xi is more concerned about China's economy than before the 20th Party Congress,” writes Neil Thomas, a fellow on Chinese politics at the Asia Society, in a tweet thread.
“Pan Gongsheng is a financial technocrat not a Xi loyalist. There was talk that Xi crony He Lifeng could become PBoC Party Secretary. Pan joined the PBoC under Zhou Xiaochuan as a Deputy Governor in 2012 and has led its State Administration for Foreign Exchange since 2015.
“But it remains TBD on how much policy clout Pan Gongsheng will have as PBOC head. Xi announced a new CCP finance commission and financial work committee in March. They will likely set policy at a higher level than the PBoC, e.g. on stimulus. We should know their leaders soon.”
China never to become world largest economy?
As its economic malaise spreads, the likelihood of China soon becoming the world’s largest economy is growing slimmer, reports Bloomberg News.
“Halfway through 2023, [China is] facing a confluence of problems: Sluggish consumer spending, a crisis-ridden property market, flagging exports, record youth unemployment and towering local government debt,” reports the financial news service.
And June data showed manufacturing continue to contract while other parts of the economy also struggled [video].
Meanwhile, the old playbook of pumping more money into the economy to lift demand isn’t feasible, with China already facing a massive oversupply in property plus a swelling local debt burden. Efforts by the U.S. to choke off China’s supply of advanced semiconductors will likely hurt growth further down the road too.
“That’s sparked a discussion about whether China is headed for a Japan-style malaise after 30 years of unprecedented economic growth,” reports Bloomberg.
“The dynamics threaten not only to lead to disappointing growth this year, but also to thwart the Chinese economy’s momentum to surpass that of the U.S.”
“We have to be prepared for slower growth in the future because China is really in transition right now from industrialization to innovation-based growth," says London School of Economics and Political Science economist Keyu Jin.
“A few years ago, it was difficult to imagine China not rapidly overtaking the U.S as the world's biggest economy,” says Bloomberg Economics chief economist Tom Orlik. “Now, that geopolitical moment will almost certainly be delayed, and it's possible to imagine scenarios where it doesn't happen at all.”
Forgive me a little self-congratulatory back-patting here. I made this supposedly “difficult to imagine” prediction back in 2020 in my book, “The Myth of Chinese Capitalism,” writing that even if China were to surpass the U.S., “it is entirely possible that China could become the biggest economy in the world but then fall behind if things go bad at home.”
Last year, I again posed the possibility China would never reach number one in a commentary entitled "Is China stuck in second place?", as well as made the point in an interview in the Financial Times.
This could happen as Beijing continues to make little progress in expanding social welfare benefits for its people, narrowing inequality, and reforming the hukou or household registration system, and the dual structure separating urban and rural land markets.
All of these I argue are prerequisites to create a broad-based consumption-driven economy, one that includes the hundreds of millions of Chinese, including migrants, who hail from the countryside.
Keep reading with a 7-day free trial
Subscribe to Trade War to keep reading this post and get 7 days of free access to the full post archives.