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An employee works on a production line at a factory that produces polyethylene flexible pipes for export in Lianyungang, Jiangsu province, on June 20. China’s exports continue to look strong, but concerns persist about the property sector and other parts of the economy. Photo: AFP
The View
by William Pesek
The View
by William Pesek

How China’s slowdown is shaking up Asia’s economic calculus

  • China’s struggles are injecting uncertainty into its neighbours and forcing reassessments when the geopolitical scene is already strained
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In Tokyo, Bank of Japan Governor Kazuo Ueda is searching for an exit from 23 years of quantitative easing. However, the answers he seeks could lie more in Beijing.
Japanese policymakers are as surprised as anyone by the underperformance of China’s economy. Back in January, Team Ueda fully expected a powerful growth boost from Asia’s biggest economy that buttressed the argument for higher borrowing costs. Instead, Japan and its neighbours are grappling with the fallout from Chinese deflation, overcapacity and dithering on efforts to end the property crisis. Even if Chinese exports are thriving, weak import activity is being felt throughout the region.

For Ueda to feel comfortable tapping the brakes, he must believe China will add more economic energy than its domestic troubles are subtracting. So far, there is scant evidence that’s going to happen in 2024.

Ueda is hardly alone. Over in Seoul, Bank of Korea officials know that the 2.7 per cent growth that many expect for Asia’s fourth-largest economy is China-dependent. South Korea’s export-driven model doesn’t work when the world’s biggest trading nation is struggling.
The same is true of officials in Bangkok, Jakarta, Kuala Lumpur, Singapore, Taipei and elsewhere in the region. This is particularly true as the “higher for longer” era in the United States looks set to persist as the US Federal Reserve slow-walks interest rate cuts.
Europe, meanwhile, is hardly booming as German growth stagnates. The geopolitical scene is chock full of potential landmines that could shake Asian markets. They range from Russia’s invasion of Ukraine to increased provocations from North Korea to Saudi Arabia’s ambitions to boost oil prices to a US election cycle that is making trade wars great again.


What does it mean for the world when Chinese consumers tighten their belts?

What does it mean for the world when Chinese consumers tighten their belts?

China’s challenges arguably loom largest of all. In April, the Asian Development Bank warned that China’s stumble could bring “spillovers to trading partners” and limit healthy growth across the region.

One reason these headwinds are so worrying is how unexpected they are. Another is that top-line Chinese growth rates mask deeper weakness below the surface. A case in point is the ways in which China’s all-important property sector is descending further into turmoil.
In May, new home prices in China fell the most since 2014. Industrial production came in weaker than expected, too, suggesting the 7.6 per cent jump in May exports year on year might not be sustainable.
Thickening the plot for Asia is how a falling yen might alter decision-making in Beijing. As Ueda’s team in Tokyo delays ending quantitative easing, the yen is sliding anew. The burning question is whether the currency’s 13 per cent drop this year prods China to engineer a weaker yuan.
No immediate step might do more to boost China’s prospects and curb deflationary pressures than a more advantageous exchange rate. However, count the ways that might backfire as the US carries out what could be one of the most chaotic elections in its history. Nothing would put US President Joe Biden’s Democrats and former president Donald Trump’s Republicans on the same page faster than China devaluing the yuan.
It takes two to wreak global economic panic. The US dollar’s surge is hoovering up global capital at a rate not seen since the mid-to-late 1990s. That episode didn’t end well for Asia, culminating in the region’s 1997-98 financial crisis.

The US dollar’s latest rally has Asia engaging in something of a reverse currency war. Governments are working to strengthen exchange rates to limit the risks of importing inflation and reduce the odds of another capital flight.

Yet this impulse collides with worries about China’s trajectory. Part of the confusion is why President Xi Jinping’s inner circle has been so slow to stabilise the property sector and deployed scores of half-measures amid declarations that bold reforms are afoot.
Here, the lessons from Japan loom large. The biggest is that when battling deflation, it is best to act quickly and with overwhelming force to restore confidence. Scores of timid steps in the 1990s to address a bad-loan crisis treated the symptoms of Japan’s trauma, not the underlying causes.

That is why Japan’s central bank remains trapped in quantitative easing quicksand. Since taking the helm in April 2023, Ueda has passed up every chance his team has had to normalise rates. Now, as China slows, Japan might have missed its window to unwind its US$5 trillion balance sheet.

Bank of Japan governor Kazuo Ueda attends a press conference after a two-day monetary policy meeting at the BOJ headquarters in Tokyo on June 14. The Bank of Japan kept its ultra-low interest rates unchanged on June 14 and stopped short of signalling another hike, pushing the yen to a fresh 34-year low against the US dollar. Photo: AFP
There is also renewed speculation that China might try its hand at quantitative easing. Earlier this month, former People’s Bank of China adviser Yu Yongding argued it was necessary to first “shake off the thinking” that quantitative easing is a taboo “so that we can launch it immediately when needed”.

Whether China would fare better with ultra-loose policies than Japan is anyone’s guess. As we learned from Japan, though, quantitative easing can’t resurrect animal spirits unless policymakers cut bureaucracy, modernise labour markets, increase productivity and empower the female half of the population.

China is likely to suffer the same fate without bold supply-side actions to reduce the size of the state sector. It needs a creative, transparent strategy to get distressed assets off property developers’ balance sheets and address the huge amounts of off-balance-sheet debt weighing on local governments.

As officials in Beijing drag their feet, economists across Asia will find themselves at the drawing board reducing growth prospects while governments are scrambling for new drivers of growth.

William Pesek is a Tokyo-based journalist and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”

William Pesek is a Tokyo-based journalist, former columnist for Barron’s and Bloomberg and author of “Japanization: What the World Can Learn from Japan’s Lost Decades”. Twitter: @williampesek
Zhou Xin
SCMP Columnist
Zhou Xin
Zhou Xin

Beijing can restore private sector confidence with another third plenary ‘magic touch’

  • Deng Xiaoping and Jiang Zemin used third plenary sessions to usher in new eras of growth. Beijing should do it again.
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The third plenary session of a central committee has long been associated with change and hope.

Next month, the key Communist Party meeting is set to tackle some big issues such as “deepening comprehensive reform”, “promoting the Chinese way of modernisation” and “building up a high-level socialist market economic system”. While the detailed agenda and the exact date of the Third Plenary Session of the 20th Central Committee are unknown, few doubt its significance for China’s future.

At the third plenary session of the 11th central committee in 1978, then leader Deng Xiaoping told the party to focus on economic development instead of class struggle, sidelining Mao Zedong’s chosen heir Hua Guofeng and throwing the “Two Whatevers” dogma of adhering to Maoist policies into the dustbin.

Chinese paramount leader Deng Xiaping (right) shakes hands with Chinese President Jiang Zemin at the end of the 14th Party Congress in Beijing in October 1992. Photo: AFP

In 1993, the third plenary session of the 14th central committee under former President Jiang Zemin declared that China’s aim is to set up “a socialist market economy system”.

The seemingly contradictory phrase was effectively a rejection of central planning in favour of pursuing a market economy. It removed the ideological barriers to shutting down loss-making state-owned enterprises and negotiating with developed countries to participate more broadly in the global economic order. It also opened the door for the country’s capitalists to join the Communist Party.

These two meetings proved so successful in engineering China’s economic ascent that hopes are once again high for similar magic to emerge from another third plenary session.

The country is in need of change more than any time since 1978, as it searches for new growth momentum in the face of a long list of challenges – including a slow post-pandemic economic recovery, high youth unemployment, unsustainable local government debt, a nationwide housing market downturn, rising tensions with major trade partners, and a plunging birth rate.

Beyond initiating important policy shifts, the 1978 and 1993 meetings are also remembered for their consensus building. Ideological debates were put on the back burner to focus on achieving pragmatic goals. The country was no longer being pulled apart by divergent political pursuits, and Chinese citizens were now able to get on the same page about what was considered important.

China is much richer than in 1978 and much more powerful than in 1993. But over the last couple of years, policy overreach and a slew of missteps have left investors scratching their heads about the country’s direction.

China’s private capital owners, for instance, were reminded three years ago that the country would have a “red and green light” system for investments, i.e. certain economic sectors or projects will not take their money. Many investors have reasonably taken a wait-and-see approach to avoid a “red light”, but there has been little follow-up, leaving people in the dark about where those lines are.

Weak investor and consumer confidence is an underlying problem for China’s economy, caused partly by a lack of trust that circumstances will improve in the future.

This is not helped by Beijing’s promise to treat the private sector “fairly”, as the division of “public ownership” and “non-public ownership” only emphasises that they are receiving different treatment. The idea that private capital is not trustworthy and profit-seeking must be checked by state power has been an overriding assumption of China’s economic policies in recent years.

Suppressing private capital and market forces, of course, will not help China fix its problems. It is the opposite of the traditional focus of China’s economic reform process: using deregulation and privatisation to unleash the country’s entrepreneurial spirit.

The third plenary will have a lot of important items on the agenda, from the fiscal relationship between central and local authorities to the improvement of the country’s fragmented welfare system. But it is also a good chance to fill in the trust gap that has emerged by removing the ideological labels put on private capital and its owners.