Newsletter 130 - September 4, 2022
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Welcome to the 130th edition of Trade War.
Economists start to question whether China’s economy will ever surpass the U.S. Youth unemployment sparked by Xi’s earlier crackdown on tech companies. Weak consumption holds back growth. And Beijing sends senior officials to the provinces in sign of concern over slowdown.
A survey of American companies reveals a precipitous drop in confidence, with over one-half reporting cancellations or delays in new investment. After release of the U.N. report on Xinjiang, multinationals face major ethical and public relations dilemma. And even as tensions roil the Taiwan Strait, no one wants to mess with TSMC, producer of advanced semiconductors for the world.
New pandemic lockdowns in China. A rare sign of dissent over Xi’s stringent Zero Covid policy. U.S. life expectancy now lags China by 2.1 years, largely because of Covid fatalities.
And “Why stimulus won’t work: It’s the consumers, stupid,” a new commentary by this newsletter’s author.
“It’s the consumers, stupid”
China’s latest spending bonanza—trillions of yuan aimed at stimulating growth—is missing the point. Beijing needs to find a way to get Chinese consumers spending, not throw more money at its economy, writes this newsletter’s author in The China Project.
“With confidence plummeting, no one is spending much at all (even in the best of times, China has struggled to lift household consumption, stuck at just under 40% of GDP, which is low compared to the 55% and higher common in other large countries). Retail sales grew just 2.7% in July, compared to 3.1% the previous month and way below the around 12% monthly average during the twenty-some years before the pandemic hit in 2020. And consumer confidence is at its lowest since 1991, the year the government first began measuring it.”
Everything from cars and communication products to jewelry and cosmetics are experiencing sharp drops in sales this year, the worst falls yet seen during the pandemic. “Persisting uncertainty in the wake of the pandemic and weak household income has hit China’s consumer and manufacturer confidence harder in 2022 than in the past two years,” says a recent report by S&P Global. “Consumers are buying less, which will slow down the recovery of China’s domestic consumption for the remainder of 2022 compared with the recovery seen in 2020 and 2021.”
Why isn’t anyone opening their wallets? First and foremost: the Zero Covid policy which necessitates rolling lockdowns, shutting down businesses and limiting most economic activity. Meanwhile, the slow motion collapse of China’s real estate market is slamming confidence too.
The unfortunate reality: Beijing can keep pumping money into the economy but that could hurt more than help. As long as China’s consumers are worried about getting locked in at home—in homes that they simultaneously watch depreciate in value—they will keep sitting on the sidelines.
China’s serious growth problem
“China has a serious growth problem. It wants more consumption and less reliance on investment and exports but consumers aren't spending like before. Reinforces our call that growth will drop to 3% permanently and faster than many think,” tweets Sergi Lanau, deputy chief economist at The Institute of International Finance.
China offline consumption drops by 1.2% of 2019 GDP
In just the first three months of the pandemic, China’s offline consumption fell by over 1.22 trillion yuan or 1.2 percent of 2019 GDP, reports the Stanford Center on China’s Economy & Institutions citing research.
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