China is investing out of the crisis, but is another one lurking?

In the country where covid-19 first appeared at the end of last year, the economy revolves like a tirelier. Where large parts of the world are struggling with the second wave of the virus, in China it seems almost forgotten.

Economic growth reached almost 5% in China in the third quarter, a peak after tough months. But there is also concern. โ€œCovid-19 has exacerbated the economic problems in China, as the rest of the world,โ€ says Michael Pettis, Professor of Finance at Beijing University.

China was the first country to hit the bottom. The lockdown came fast and hard, and entailed a 6.8 percent shrinkage. A so-called v-form recovery followed: after a quick walk down, the road up was found again. โ€œMany people were surprised at how quickly China recovered,โ€ says Pettis.

The professor does not find the high growth rates surprising. โ€œNot because I have better models than the IMF, or anyone else. It is because we know more or less the minimum amount of growth that is politically acceptable for Beijing.โ€ By 2035, gross domestic product should be twice as large as this year, which translates into an annual growth rate of 4.7% on average.

In a recent estimate, IMF economists expected a growth in the Chinese economy of 1.9 percent this year, followed by an acceleration of 8.2 percent in 2021, much higher than in the Netherlands. According to Pettis, growth needs to be looked at differently in China than in the Netherlands, Brazil or the USA.

โ€œ In the latter countries, growth is an output: one measures what the economy does. In China, it is an input: the government decides what growth should be. If real growth deviates too far from that, spending in the public sector will increase.โ€ In Wuhan alone, EUR 5.8 billion will be spent this year on roads, railways and the expansion of the port.

In the streets of Wuhan, the city that was the epicenter of the coronacrisis, the musicians are back. Parties, parties, weddings: its all possible again. And the amusement park on the outskirts of Wuhan is free for the rest of the year.

According to Pettis, such investments are intended to generate economic activity now, but generate little growth over time. โ€œChina already has infrastructure that is among the best in the world. Do you need to invest even more in high-speed lines?โ€

Chinas ambition was precisely to sustain sustainable growth. President Xi Jinping introduced the term dual circulation this spring. By this he means that the Chinese economy must be further intertwined with the world economy and that much should be exported, international circulation.

The other branch is internal circulation. Because of the uncertainties surrounding covid-19 and the trade quarrel with the US, China is strengthened in the idea that it should learn to stand on its own feet faster, with state-driven domestic production and consumption.

No willingness to distribute prosperity

Old wine in new bags, says Pettis. โ€œA more balanced economy has been discussed for a long time. To do this, you need to make sure that households have more money left, so that they spend more.โ€

After two disappointing quarters, consumption is back on the rise. But a stronger redistribution of wealth to households is a political dilemma for policymakers in Beijing. โ€œIn the Chinese context, that means that local authorities and the Chinese elite must accept that it is at the expense of their share of the economy,โ€ says Pettis. โ€œThere is no such willingness.โ€

The new wave of investment, albeit smaller than in previous years, would be mainly intended to keep unemployment down. โ€œYou can build a railway line and say that because of this workers have more money to spend, you can keep shopping malls open until midnight. But thats not how it works.โ€

Meanwhile, debts continue to accumulate. According to the Institute of International Finance, Chinese companies, households and government debt amounted to around 318 percent of GDP at the end of the first quarter. A figure that would now have increased to about 335 percent.

Large-scale bankruptcies are not there or hardly there, and will not come, thinks Professor Pettis. โ€œNot because there are no bad debts, but simply because the government finds it too chaotic.โ€

Where does that lead to? โ€œA crisis, as happened in the United States in the 1930s, is an option where the economy is shrinking sharply in a short time. More likely is the Japanese scenario, where you are going to see very low growth for decades and the economy is slowly adjusting.โ€