Xi Jinping needs a Plan B

But even within the Caixin data there was a worrying indicator of weakness: new export orders fell for the first time in eight months.

It’s not just that there is growing unrest in the US and Europe about the growing tide of cheap exports leaving China’s vast manufacturing base.

The US economy, which has been growing more strongly than other developed economies, appears to be slowing and eurozone economies continue to show only modest positive growth rates, weighing on external demand.

The data also shows that both input costs and manufacturers’ selling prices have fallen. This is consistent with the narrative that China’s manufacturing capacity is experiencing overcapacity, leading to discounting and deflation in factory prices. Given weak domestic demand, this is also leading to a shift of production to export markets.

Within the headline figures, there were early signs that Xi’s efforts to reposition China’s manufacturing base were having an effect.

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While Xi has tried to cling to the old, large-scale, relatively low-tech industrial activities that have driven China’s growth for decades, he has provided subsidies and cheap credit to the high-tech sectors that he wants China to dominate, such as electric vehicles, semiconductors, artificial intelligence, aerospace and green energy.

Sub-indices in the PMI data showed that the high-tech production index rose to 51.7 in August from 49.4 in July.

Advanced technologies are at the heart of Xi’s long-term economic strategies, but China faces resistance from the US, Europe and other economies.

The US has cut off China’s access to advanced semiconductors, which are essential for most new technologies, and is calling on its allies to join it.

The US, Europe and Canada have imposed import duties on electric vehicles produced in China. The US and Canada have increased import duties on Chinese steel and aluminium. In addition, Europe is conducting investigations into other Chinese exports, including investigations into the export of solar panels and wind turbines from China.

The specter of Donald Trump also hangs like a dark cloud over Xi’s strategy, as he has promised to impose 60 percent tariffs on all imports from China (in addition to a base 10 percent tariff on all other imports) should he return to the White House.

Xi’s plans for the future of China’s economy, which focus on high-tech and exports, would fail if China is shut out of major world markets.

While some modest, rather ad hoc measures have been taken to stimulate the domestic economy, Xi appears to have no plan B.

He opposes the massive stimulus programs that outside economists have been pushing for in the years since the pandemic, apparently because he sees massive government spending to boost consumption as wasteful.

The implosion of China’s real estate sector, which has been in an implosion for three years now, has undermined consumer confidence and household spending and continues to weigh on economic activity and growth.

It has also destabilized the finances of over-indebted local governments, which relied on land sales and property income for revenue.

Although Beijing generates the bulk of China’s government revenues, it is local governments that spend most of the money and provide most of the community services.

As the real estate sector continues to slump — the value of new home sales (according to data from China’s 100 largest real estate companies) fell nearly 27 percent in August from a year earlier, an acceleration from a 19.7 percent decline in July — local governments need the help their party leaders promised at their “third plenum” meeting earlier this year.

During the plenary debate, party officials promised to give them more “autonomous fiscal capacity,” allowing them to generate more revenue independently.

Should Trump win the November presidential election and implement his trade policies, the prospect of a global trade war would dominate the debate over whether China’s GDP growth will be a 5 or a 4 this year.

They also decided to set up a ‘long-term mechanism’ to address unsustainable debt levels within local government financing instruments and allow local governments to raise more money directly by issuing special bonds.

It would also be helpful if Beijing gave them a bigger share of the revenue.

The troubled and heavily indebted local governments are a bottleneck for the domestic economy. Their income from land sales has fallen by more than 20 percent in the past year, forcing cuts.

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Authorities in Beijing have tried a series of relatively small-scale measures to halt the housing market downturn, and are reportedly considering another measure: allowing homeowners to refinance their mortgages to lower their borrowing costs.

In effect, that would transfer value and money from banks to homeowners. Whether it would have any material effect on consumption and growth is doubtful, as households, having seen their property-based wealth destroyed, are in a deeply defensive mode.

In the absence of a large-scale stimulus program, or an unexpected and significant reversal of the real estate downturn, Western economists believe China will struggle to meet this year’s economic growth target of “around 5 percent” and that growth will be even more muted next year.

This slowdown is obviously not good news for a region, including Australia, that benefits from growth in China. Nor for the global economy if the other major economic power, the US, also slows down.

Should Trump win the November presidential election and implement his trade policies, the prospect of a global trade war would dominate the debate over whether China’s GDP growth will be a 5 or a 4 this year.

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