Economic Shift in China
China’s Year of Production
The economic shift in China, with the end of real estate growth and reduced consumption, Xi Jinping is focusing on industry. A new model for an economy facing crisis. Is tension with the European Union ahead?
The Central Economic Work Conference was held on December 11 and 12, a traditional meeting where Chinese leaders set guidelines for economic policy actions for the coming year. This year’s meeting is significant in itself because Beijing sees itself at a significant turning point in its economic model. Discussions on the quality of economic growth, growth levers, revision of some identity decisions of the past three years, and the relationship with Western economies are on the table. The keyword for this stage is trust, which is understandable both in the relationship between Chinese consumers and the national economy and in foreign investors’ attitudes towards Beijing.
Goals of Progress and Stability
In the uncertain lexicon and vague party vocabulary adopted on such occasions, the most important phrase that emerged from the Central Economic Work Conference is the effort to pursue progress while seeking stability, consolidating stability through progress, and building new elements firmly before abolishing and removing the old ones.
To better understand its meaning, we must recall China’s key economic points and some decisions made since 2022. In summary, the economic system, with a combination of exports, especially until 2008, the year of the international financial crisis that led to a decrease in international demand, public investment in infrastructure and real estate with a 2008 stimulus to compensate for reduced exports, and consumption, at least since 2014, as a lever for sustainable growth over time, has been at the center of economic activities.
Although consumption is verbally the government’s priority, since 2020, China has grown thanks to the positive trend of exports with secondary production in the post-pandemic stage. However, consumption is not increasing due to the growing distrust of consumers towards China’s economic trend, especially after facing very restrictive measures to contain the pandemic until the end of 2020 and due to the non-transparent decision-making process of institutions. Quarantines were imposed and lifted without warning and prior notice, resulting in a growing savings rate.
Given these premises, we must now understand how Xi Jinping moved in this context. For political reasons, he added a difficult and unimplemented transition to consumerism, regulation of private companies, especially technology, and combating real estate speculation. According to some estimates, the so-called tightening and technology restrictions have cost large Chinese technology companies up to $1,100 billion in losses, and at the beginning of 2023, signs of a willingness to retreat from these measures were seen.
Similarly, real estate regulations led to a crisis in this sector, costing the equivalent of 5% of the national GDP. Therefore, the desire to create order in sectors affected by crisis issues was accompanied by a crisis in these sectors, which ultimately had a negative impact on national growth.
Therefore, Xi Jinping’s aforementioned remarks imply a willingness to adopt a less radical approach in addressing some deviations and problems, ensuring that the effort for stability does not weigh on growth, which is recognized as progress. It should also be noted that these actions contributed to the general level of distrust mentioned above.
Industry: The New Chinese Mantra
Now the question arises: how is Xi Jinping trying to revive growth? The preferred path will focus on consumption, but achieving this seems unlikely due to public distrust. Meanwhile, investment in real estate or infrastructure is no longer as profitable as before due to excessive construction without considering the speculative principle of real estate. Thus, the Chinese government supports investment aimed at growth with a special focus on production.
Significant data and statistics related to annual bank loan growth are measured every three months. Compared to the general growth rate of 109% in September 2023, loans granted to the real estate sector decreased by 0.2%, following a regular downward trend since 2020 when it increased by 15%, while in the manufacturing sector it increased by 382%.
This can be translated to mean that with the pandemic and real estate regulations, China stopped investing in real estate and focused everything on production. What will the results be? The boom in Chinese exports and more than doubling Europe’s trade deficit with China, which has now reached 400 billion euros.
Thus, what is taking shape is the return of China’s industrial overcapacity issue, a consequence of the 2008 stimulus. However, at that time, the industrial overcapacity was related to sectors that were publicly supported at the time: steel, glass, aluminum, and cement for infrastructure and construction, whereas today it relates more than anything to advanced products. This situation is a concern for Europe because China’s industrial boom could undermine efforts to strengthen EU production in the energy sector and digital transition, as well as reduce Europe’s global market share.
Essentially, the entire agenda and industrial programs of Europe in recent years, which are already facing challenges due to a weak position in key industrial sectors, are at risk of overproduction and subsequently price wars from Chinese companies. Moreover, unlike the past, in sectors where investments are made, today China not only has a better position in terms of production costs but also has technological superiority, for example in solar panels, batteries, and electric vehicles.
2024: A Hot Year Between the EU and China
Therefore, it is no coincidence that Ursula von der Leyen, President of the European Commission, emphasized the trade imbalance during her visit to Beijing on the occasion of the EU-China summit on December 7 and 8. Xi Jinping also responded by pointing out that the European Commission itself is involved in industrial policies and measures to limit imports from China, especially in the automotive sector.
In any case, the important issue is that it seems 2024 will be recognized as the year of the return of trade frictions as the first topic of confrontation in EU-China relations. In a situation where Beijing finds itself forced to insist on investment in the manufacturing sector as the only suitable way to support growth, as it faces difficulties in both real estate and completing the transition to consumerism.
Moreover, focusing on production in the technology sector aims to reduce dependence on foreign manufacturers, especially in semiconductors. Beyond domestic issues, the international scenario, characterized by competition among major powers and increased economic security or political risk value in localizing productive investments, plays a significant role.
Indeed, foreign direct investment in China has reached its lowest point in 26 years, and there is also talk of capital flight. The reasons for this trend may vary, but they are related to uncertainties about China’s economic trajectory, Beijing’s relations with other parts of the world, and Xi Jinping’s political actions, which are largely unpredictable. The most notable example is the quiet postponement of the third plenary session of the Central Committee of the Communist Party of China, which was scheduled for the fall and has not been heard of.
What is predicted for China in 2024? Undoubtedly, it may struggle more to achieve high growth levels as traditional growth levers are increasingly weakened and new levers are trying to emerge. China’s option to focus on production will bring benefits in increasing exports and strengthening the national industrial sector but could be a factor for explicit conflict with the European Union, which might be convinced to take decisive actions in managing economic relations with Beijing.