Has China’s economy run out of steam?

Published

2 years ago

September 4, 2023

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The southern Chinese city of Zunyi is awash with signs the nation’s economy is not in good health.

Everywhere you look there are unfinished infrastructure projects; empty apartments, half-constructed tunnels, huge projects where, it seems, the money just ran out.

It is a symbol of a system that is stuttering.

The mighty Chinese economy, that once delivered seemingly miraculous growth of some 10% plus a year, is slowing.

Cracks, driven by structural weaknesses that were once easy to pave over, have started to appear.

The economic model of driving up GDP with vast borrowing and building worked when China was poor and needed new roads, bridges and airports, but it is no longer sustainable in a modern China that now finds itself drowning in debt and with nothing left to build.

There are big questions about what happens next.

In Zunyi, one road in particular speaks volumes about the troubles now plaguing parts of the system.

Snaking over parts of the city, the Funxin Expressway is a multilane highway that cost 4bn yuan to build, but sections now lie incomplete and abandoned.

On one side, a handful of cars occasionally drive by, the other is completely empty save for a few locals who now use it to take a stroll or walk their dogs.

There is something almost eerie about walking along it – a sense that the area has been somewhat forgotten.

A local woman, Mrs Chen, tells us the bridge has been like this for ten years.

“A lot of land was taken, many people had to move away,” she says.

“Why has the construction just stopped?” she asks, “This is a government fund, I think they didn’t use the money for anything. I think it’s been wasted.”

When we asked local authorities, the Ministry of Foreign Affairs Zunyi branch said the expressway was completed on 31 August 2023 (just two days after we visited) and is scheduled to be put in use the first half of September.

They added the local government “actively encourages and guides construction companies and developers to move forward with construction in an orderly fashion,” and that the government “strictly follows national and provincial rules and regulations on investment and management”.

On the other side of a small hill, I find the connecting tunnel, where the project has come to an abrupt stop.

Opposite the entrance of the tunnel are huge concrete pillars where construction was clearly meant to continue and beyond that, blocks of homes vacated and marked for demolition – lives moved on to make space.

There are just a few residents who have hung on here, including Shi Chunli who has lived here for 40 years.

She claims to have given the authorities her property in exchange for a new apartment elsewhere.

“They said we would have a new apartment in three years” she says, “it will be the fifth year this September, but everything is still the same.”

And she has a pretty clear idea as to why her life is in this limbo.

“It’s mainly that there is no money. The state does not have any money left.”

There are projects like this across China, but there is a particularly high concentration in Guizhou province, where Zunyi is located.

In fact, Guizhou province, one of the poorest in the country, is also the most indebted with its debt pile over 135% of its GDP.

This rural province leaned heavily into the Chinese growth model that for so long delivered such remarkable numbers: huge borrowing, massive investment and vast building – regardless of whether the projects were needed.

Indeed, Guizhou has 11 airports, many quite close to each other, and nearly half of the world’s 100 tallest bridges, according to state media outlet Economic Daily.

It is a model that has been replicated throughout the country. Investment has made up an average of 44% of China’s economy in recent years, for which experts say there is “no remotely comparable historical precedent”.

But while this model made sense when China was playing catch up, it has now become a major liability.

The government has few places to turn to deliver the high growth it has become accustomed to.

But this is a problem the government cannot ‘invest’ its way out of, as it has in the face of previous economic challenges.

As many experts will point out, this level of unproductive investment has been a symptom of the Chinese economy for many years, so why is it biting now?

It is largely because other parts of the economy are struggling – exposing the fault lines at its core.

Last month, prices in China actually fell when compared to the same month last year, raising fears of more long-term deflation.

The key issue is that consumer demand simply hasn’t bounced back post-pandemic as China’s leaders hoped it would.

Months of zero-COVID rules that saw whole cities plunged into sudden extreme lockdowns destroyed thousands of businesses and vastly depleted family savings.

The net result is that people just don’t have the money to spend, and what they do have they are reluctant to part with (China’s saving rate is one of the highest in the world according to the IMF).

These trends were clear in some of the smaller markets around Zunyi.

“Business is bad now,” one stall holder told us, “it’s getting worse year after year.”

And why?

“The pandemic,” she says, “the impact of the pandemic is too big.”

There are other issues too, highly interventionist government policy that cracked down on certain industries like tech and private tutoring have left certain sectors crippled and foreign investment nervous.

And in this environment millions of young people are struggling to find work; the number of 16-year-olds out of work in June was a record 21.3%.

The government has since stopped publishing these figures, but experts fear the true number may be much higher.

But perhaps most threatening of all is the deep crisis in the housing market.

In a similar way to local government spending on infrastructure, Chinese developers have spent years borrowing huge sums to build millions of apartments, often pre-selling them to buyers before construction was complete.

Following moves by the central government in 2021 to try and curb this excessive borrowing, many found themselves unable to afford their debt payments and some like Evergrande, once one of China’s biggest developers, defaulted.

It plunged the market into a crisis which it has struggled to recover from, leaving many buyers with unfinished homes and many others unwilling to invest in property.

Prices have fallen and there have been huge knock-on impacts on industries that service construction.

This month, the spotlight has been on Country Garden, another Chinese developer, once considered a safe pair of hands, as it too struggled to make a scheduled bond payment.

Shares in the firm have rallied, however, following reports it has agreed a deal with creditors to make the payments in instalments over the next three years.

There are fears about how all this will play out and whether it will affect the rest of the world.

With the Chinese economy facing increasing global scrutiny, President Xi Jinping has surprised commentators by signalling he will not attend this weekend’s G20 summit in India. Premier Li Qiang will attend instead.

But experts insist there almost certainly won’t be a major financial crash.

“It’s very unlikely because the financial breakdown is really a balance sheet breakdown,” explains Michael Pettis, a renowned expert on the Chinese economy and professor at Peking University.

“In China, the regulators are so powerful, and they can restructure liabilities at will, so that you will never have a balance sheet breakdown.

“Over the long-term, that’s a bad thing because it means that the necessary adjustment is much slower than otherwise. But from a social and political point of view, that’s a good thing, particularly over the short-term.”

What is most likely, he and other experts insist, is that China sees a more prolonged period of slow down and re-adjustment in its economy akin to what happened to Japan from the 1990s onwards.

There will, however, likely be some pain to come for ordinary Chinese people as this slow but ultimately necessary process plays itself out.

Business

Trump trade war escalation sparks global market sell-off

Published

3 hours ago

April 3, 2025

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Trump trade war escalation sparks global market sell-off

Donald Trump’s trade war escalation has sparked a global sell-off, with US stock markets seeing the biggest declines in a hit to values estimated above $2trn.

Tech and retail shares were among those worst hit when Wall Street opened for business, following on from a flight from risk across both Asia and Europe earlier in the day.

Analysis by the investment platform AJ Bell put the value of the peak losses among major indices at $2.2trn (£1.7trn).

The tech-focused Nasdaq Composite was down 5.8%, the S&P 500 by 4.3% and the Dow Jones Industrial Average by just under 4% at the height of the declines. It left all three on course for their worst one-day losses since at least September 2022 though the sell-off later eased back slightly.

Trump latest: UK considers tariff retaliation

Analysts said the focus in the US was largely on the impact that the expanded tariff regime will have on the domestic economy but also effects on global sales given widespread anger abroad among the more than 180 nations and territories hit by reciprocal tariffs on Mr Trump‘s self-styled “liberation day”.

They are set to take effect next week, with tariffs on all car, steel and aluminium imports already in effect.

Price rises are a certainty in the world’s largest economy as the president’s additional tariffs kick in, with those charges expected to be passed on down supply chains to the end user.

The White House believes its tariffs regime will force employers to build factories and hire workers in the US to escape the charges.

Economists warn the additional costs will add upward pressure to US inflation and potentially choke demand and hiring, ricking a slide towards recession.

Apple was among the biggest losers in cash terms in Thursday’s trading as its shares fell by almost 9%, leaving it on track for its worst daily performance since the start of the COVID pandemic.

Concerns among shareholders were said to include the prospects for US price hikes when its products are shipped to the US from Asia.

Other losers included Tesla, down by almost 6% and Nvidia down by more than 6%.

Many retail stocks including those for Target and Footlocker lost more than 10% of their respective market values.

The European Union is expected to retaliate in a bid to put pressure on the US to back down.

The prospect of a tit-for-tat trade war saw the CAC 40 in France and German DAX fall by more than 3.4% and 3% respectively.

The FTSE 100, which is internationally focused, was 1.6% lower by the close – a three-month low.

Financial stocks were worst hit with Asia-focused Standard Chartered bank enduring the worst fall in percentage terms of 13%, followed closely by its larger rival HSBC.

Among the stocks seeing big declines were those for big energy as oil Brent crude costs fell back by 6% to $70 due to expectations a trade war will hurt demand.

The more domestically relevant FTSE 250 was 2.2% lower.

A weakening dollar saw the pound briefly hit a six-month high against the US currency at $1.32.

There was a rush for safe haven gold earlier in the day as a new record high was struck though it was later trading down.

Sean Sun, portfolio manager at Thornburg Investment Management, said of the state of play: “Markets may actually be underreacting, especially if these rates turn out to be final, given the potential knock-on effects to global consumption and trade.”

He warned there was a big risk of escalation ahead through countermeasures against the US.

Sandra Ebner, senior economist at Union Investment, said: “We assume that the tariffs will not remain in place in the
announced range, but will instead be a starting point for further negotiations.

“Trump has set a maximum demand from which the level of tariffs should decrease”.

She added: “Since the measures would not affect all regions and sectors equally, there will be winners and losers as in 2018 – although the losers are more likely to be in the EU than in North America.

“To protect companies in Europe from the effects of tariffs, the EU should not respond with high counter-tariffs. In any case, their impact in the US is not likely to be significant. It would be more efficient to provide targeted support to EU companies in the form of investment and stimulus.”

Business

British businesses issue warning over ‘deeply troubling’ Trump tariffs

Published

3 hours ago

April 3, 2025

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British businesses issue warning over 'deeply troubling' Trump tariffs

British companies and business groups have expressed alarm over President Donald Trump’s 10% tariff on UK goods entering the US – but cautioned against retaliatory measures.

It comes as Business Secretary Jonathan Reynolds launched a consultation with firms on taxes the UK could implement in response to the new levies.

Money blog: Pension top-up deadline days away

A 400-page list of 8,000 US goods that could be targeted by UK tariffs has been published, including items like whiskey and jeans.

On so-called “Liberation Day”, Mr Trump announced UK goods entering the US will be subject to a 10% tax while cars will be slapped with a 25% levy.

The government’s handling of tariff negotiations with the US to date has been praised by representative and industry bodies as being “cool” and “calm” – and they urged ministers to continue that approach by not retaliating.

Business lobby group the CBI (Confederation of British Industry) said: “Retaliation will only add to supply chain disruption, slow down investment, and stoke volatility in prices”.

Industry body the British Retail Consortium (BRC) also cautioned: “Retaliatory tariffs should only be a last resort”.

‘Deeply troubling’

While a major category of exports, in the form of services – like finance and information technology (IT) – has been exempted from the tariffs, the impact on UK business is expected to be significant.

Mr Trump’s announcement was described as “deeply troubling for businesses” by the CBI’s chief executive Rain Newton-Smith.

The Federation of Small Businesses (FSB) also said the tariffs were “a major blow” to small and medium companies (SMEs), as 59% of small UK exporters sell to the US. It called for emergency government aid to help those affected.

“Tariffs will cause untold damage to small businesses trying to trade their way into profit while the domestic economy remains flat,” the FSB’s policy chair Tina McKenzie said. “The fallout will stifle growth” and “hurt opportunities”, she added.

Companies will need to adapt and overcome, the British Export Association said, but added: “Unfortunately adaptation will come at a cost that not all businesses will be able to bear.”

Watch dealer and component seller Darren Townend told Sky News the 10% hit would be “painful” as “people will buy less”.

“I am a fan of Trump, but this is nuts,” he said. “I expect some bad months ahead.”

Industry body Make UK said the 25% tariffs on cars, steel and aluminium would in particular be devastating for UK manufacturing.

Cars hard hit

Carmakers are among the biggest losers from the world trade order reshuffle.

Auto industry body the Society of Motor Manufacturers and Traders (SMMT) said the taxes were “deeply disappointing and potentially damaging measure”.

“These tariff costs cannot be absorbed by manufacturers”, SMMT chief executive Mike Hawes said. “UK producers may have to review output in the face of constrained demand”.

The new taxes on cars took effect on Thursday morning, while the measures impacting car parts are due to come in on 3 May.

Business

Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Published

3 hours ago

April 3, 2025

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Trump trade war: The blunt calculation that should have spared UK from reciprocal tariffs

Economists immediately started scratching their heads when Donald Trump raised his tariffs placard in the Rose Garden on Wednesday.

On that list he detailed the rate the US believes it is being charged by each country, along with its response: A reciprocal tariff at half that rate.

So, take China for example. Donald Trump said his team had run the numbers and the world’s second-largest economy was implementing an effective tariff of 67% on US imports. The US is responding with 34%.

Trump latest: UK considers tariff retaliation

How did he come up with that 67%? This is where things get a bit murky. The US claims it studied its trading relationship with individual countries, examining non-tariff barriers as well as tariff barriers. That includes, for example, regulations that make it difficult for US exporters.

However, the actual methodology appears to be far cruder. Instead of responding to individual countries’ trade barriers, Trump is attacking those enjoying large trade surpluses with the US.

A formula released by the US trade representative laid this bare. It took the US’s trade deficit in goods with each country and divided that by imports from that country. That figure was then divided by two.

So, in the case of China, which has a trade surplus of $295bn on total US exports of $438bn, that gives a ratio of 68%. The US divided that by two, giving a reciprocal tariff of 34%.

This is a blunt measure which targets big importers to the US, irrespective of the trade barriers they have erected. This is all part of Donald Trump’s efforts to shrink the country’s deficit – although it’s US consumers who will end up paying the price.

But what about the small number of countries where the US has a trade surplus? Shouldn’t they actually be benefiting from all of this?

That includes the UK, with whom the US has a surplus (by its own calculations) of $12bn. By its own reciprocal tariff formula, the UK should be benefitting from a “negative tariff” of 9%.

Instead, it has been hit by a 10% baseline tariff. Number 10 may be breathing a sigh of relief – the US could, after all, have gone after us for our 20% VAT rate on imports, which it takes issue with – but, by Trump’s own measure, we haven’t got off as lightly as we should have.