Smearing China's Economy Cannot Save Western Economies

March 21, 2024

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China's economic growth seemed unsatisfactory in 2023. Western media ran multiple campaigns to further discredit China's economy. Many analysts picked up theories implying China's economic growth is hitting a ceiling, heading towards a wall, or even on the verge of collapse. Despite these narratives and hurdles, China's economic growth in 2023 remains significant, accounting for nearly one-third of total global economic growth. ¹

 

Smearing China to Save the West

China's economy encountered unprecedented difficulties due to internal and external factors in 2023. Internally, China underestimated the economic damage caused by the COVID-19 pandemic, which led to increased bad debts, particularly for small and medium sized enterprises. To address this, the banking system enforced debt repayment and bankruptcy programs. The surge in bad debts caused by bankruptcies made banks more aggressive in collecting debts from companies, inducing a vicious cycle. Externally, the economic downturn in developed countries further exacerbated the situation, particularly demonstrated by the decline of China's export orders.

Western economies are experiencing the harsh realities of growth recovery, including low ebbs in the growth cycle, bottlenecks in new technology development, and the end of a loose monetary policy. Rising capital costs pose challenges for new tech firms looking to secure funding. Adding to the complexity, some politicians in the United States and Europe are advocating for decoupling from China. Subsequently, the language around decoupling has shifted to "de-risking," but the context and intent remains the same. The objective remains to distance the West from China's manufacturing sector. To an extent, China's export market will find it hard to regain the previous level of eminence it held in the global market for the foreseeable future.

To combat economic stagnation, Western institutions attempted to smear the Chinese economy. The Federal Reserve and the European Central Bank raised interest rates, widening interest rate differentials between China and the West, and fueling rumors suggesting that peak investment opportunities in China had passed. This narrative aims to divert more Chinese capital to the United States and Europe. If we look at capital flight from China to the West, the current round of negative campaigning from the United States and Europe has had an effect. Compared with previous years, there has been a significantly increased outflow of portfolio investment in 2023, with notable fund outflows also observed in the Hong Kong stock market. Capital outflows have intensified depreciation pressure on the RMB, causing unease among wealthy Chinese investors and accelerating the capital flight trend from China.

 

Decoupling from China Won't Save the West.

The United States and Europe are pursuing a geopolitical rivalry with China by distancing themselves from China and impeding China's accelerated development through market leveraging. However, in the not-so-distant past, in the golden age of globalization, large multinational companies centered their global supply chains around China. Presently, it is still challenging to exclude China from the global supply chain.

Discussing Donald Trump's threat to raise tariffs by 60% on Chinese exports in the US, some CEOs of American companies joked that such a move could be a shock therapy moment for the US economy. Even the CEO of Raytheon, a powerful US military-industrial complex player, said that they could not afford to decouple from China, because Raytheon had several thousand suppliers in China.²

Studies carried out by US scholars revealed that although exports from Mexico, certain Southeast Asian, and South Asian countries to the United States increased significantly, these trades were an extension of Sino-US trade. As these countries increased their exports to the United States, China's exports to these "middleman" nations also witnessed substantial growth. To avoid the high tariffs imposed by the United States, many Chinese companies have relocated parts of their supply chains to those countries. However, it is impossible to find all required parts and components needed locally, so Chinese companies cannot but continue to purchase goods from traditional upstream Chinese suppliers. This approach actually increases costs, reduces efficiency, and, to some extent, exacerbates inflationary pressure on the United States and Europe.

 

Another "Nixon's Default" Is Impending.

US Treasury Secretary Janet Yellen and US Commerce Secretary Gina Raimondo's consecutive visits to China essentially aimed to increase Chinese purchases of US financial products, including US Treasury bonds, in exchange for lower US tariffs. However, US financial products present greater risk at present due to escalating political and economic uncertainties. After the Ukraine crisis broke out, the United States and Europe froze the financial assets of Russia's central bank and threatened to confiscate them to compensate for Ukraine's war losses. The assets of some wealthy Russians in the United States were also confiscated, despite that many of them had believed sincerely in the free market economy of the US.

As the United States regards China as its biggest threat, does China still have an incentive to continue buying large amounts of American financial assets? In addition, the US debt has risen rapidly enough that overseas investors may question whether the US will be able to pay off these debts in the future. The book This Time Is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff explains that inflation and currency devaluation are the only options when a country's debt becomes too heavy.³ The United States and Europe have used this maneuver for the past 800 years. The most recent modern example was Nixon's US default in 1971, leading to the collapse of the Bretton Woods system and a sharp depreciation of the US dollar. Western European countries and Japan, which held large amounts of US national debt, paid a heavy price during this period. Therefore, some economists evaluate the short-term rebound of the US economy as a "flashback before death," because this spike came at the expense of a large fiscal deficit and a sharp increase in debt. Drawing parallels to the dollar crisis in 1971, which was directly related to the United States' involvement in the Vietnam War starting in 1965, the current surge in US debt is related to a sharp increase in US military spending. The Biden administration wants to provide Ukraine and Israel with a steady stream of weapons. The looming questions are: How long will it take for the United States to face a debt crisis? How should the world cope with this incumbent disaster?

 

1. "China Willing to Be Stabilizing Force for Global Growth: FM," Xinhua, February 18, 2024, https://english.news.cn/20240218/f2384faa546c49298f3e33101a664569/c.html.

2. Sylvia Pfeifer, "'We Can De-Risk but Not Decouple from China, Says Raytheon Chief," Financial Times, June 19, 2023, https://www.ft.com/content/d0b94966-d6fa-4042-a918-37e71eb7282e.

3.  Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2008).

 

Please note: The above contents only represent the views of the author, and do not necessarily represent the views or positions of Taihe Institute.

 

This article is from the February issue of TI Observer (TIO), which examines the contextual nuance of Chinese economics and its subsequent impacts. If you are interested in knowing more about the February issue, please click here:

http://www.taiheinstitute.org/Content/2024/02-29/1107328303.html

 

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