Has China’s economy run out of steam?
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.”
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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.
Some of the world’s leading tech companies are betting big on very small innovations.
Last week, Samsung released its Galaxy Z Fold 7 which – when open – has a thickness of just 4.2mm, one of the slimmest folding phones ever to hit the market.
And Honor, a spin-off from Chinese smartphone company Huawei, will soon ship its latest foldable – the slimmest in the world. Its new Honor Magic V5 model is only 8.8mm thick when folded, and a mere 4.1mm when open.
Apple is also expected to release a foldable in the second half of next year, according to a note by analysts at JPMorgan published this week.
The race to miniaturise technology is speeding up, the ultimate prize being the next evolution in consumer devices.
Whether it be wearable devices, such as smartglasses, watches, rings or foldables – there is enormous market potential for any manufacturer that can make its products small enough.
Despite being thinner than its predecessor, Honor claims its Magic V5 also offers significant improvements to battery life, processing power, and camera capabilities.
Hope Cao, a product expert at Honor told Sky News the progress was “due largely to our silicon carbon battery technology”. These batteries are a next-generation breakthrough that offers higher energy density compared to traditional lithium-ion batteries, and are becoming more common in consumer devices.
The Magic V5. Pic: Honor
Honor also told Sky News it had used its own AI model “to precisely test and find the optimum design, which was both the slimmest, as well as, the most durable.”
However, research and development into miniaturisation goes well beyond just folding phones.
A company that’s been at the forefront of developing augmented reality (AR) glasses, Xreal, was one of the first to release a viable pair to the consumer market.
Xreal’s Ralph Jodice told Sky News “one of our biggest engineering challenges is shrinking powerful augmented reality technology into a form factor that looks and feels like everyday sunglasses”.
Xreal’s specs can display images on the lenses like something out of a sci-fi movie – allowing the wearer to connect most USB-C compatible devices such as phones, laptops and handheld consoles to an IMAX-sized screen anywhere they go.
Pic: Xreal
Experts at The Metaverse Society suggest prices of these wearable devices could be lowered by shifting the burden of computing from the headset to a mobile phone or computer, whose battery and processor would power the glasses via a cable.
However, despite the daunting challenge, companies are doubling down on research and making leaps in the area.
Social media giant Meta is also vying for dominance in the miniature market.
Ray-Ban Meta AI glasses are shown off at the annual British Educational Training and Technology conference. Pic: PA
Meta’s Ray-Ban sunglasses (to which they recently added an Oakley range), cannot project images on the lenses like the pair from Xreal – instead they can capture photos, footage and sound. When connected to a smartphone they can even use your phone’s 5G connection to ask Meta’s AI what you’re looking at, and ask how to save a particular type of houseplant for example.
Gareth Sutcliffe, a tech and media analyst at Enders Analysis, tells Sky News wearables “are a green field opportunity for Meta and Google” to capture a market of “hundreds of millions of users if these devices sell at similar rates to mobile phones”.
Li-Chen Miller, Meta’s vice president of product and wearables, recently said: “You’d be hard-pressed to find a more interesting engineering problem in the company than the one that’s at the intersection of these two dynamics, building glasses [with onboard technology] that people are comfortable wearing on their faces for extended periods of time … and willing to wear them around friends, family, and others nearby.”
Mr Sutcliffe points out that “Meta’s R&D spend on wearables looks extraordinary in the context of limited sales now, but should the category explode in popularity, it will be seen as a great strategic bet.”
Facebook founder Mark Zuckerberg’s long-term aim is to combine the abilities of both Xreal and the Ray-Bans into a fully functioning pair of smartglasses, capable of capturing content, as well as display graphics onscreen.
However, despite recently showcasing a prototype model, the company was at pains to point out that it was still far from ready for the consumer market.
This race is a marathon not a sprint – or as Sutcliffe tells Sky News “a decade-long slog” – but 17 years after the release of the first iPhone, people are beginning to wonder what will replace it – and it could well be a pair of glasses.
Business
US trade war: The state of play as Trump signs order imposing new tariffs – but there are more delays
Donald Trump’s trade war has been difficult to keep up with, to put it mildly.
For all the threats and bluster of the US election campaign last year to the on-off implementation of trade tariffs – and more threats – since he returned to the White House in January, the president‘s protectionist agenda has been haphazard.
Trading partners, export-focused firms, customs agents and even his own trade team have had a lot on their plates as deadlines were imposed – and then retracted – and the tariff numbers tinkered.
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While the UK was the first country to secure a truce of sorts, described as a “deal”, the vast majority of nations have failed to secure any agreement.
Deal or no deal, no country is on better trading terms with the United States than it was when Trump 2.0 began.
Here, we examine what nations and blocs are on the hook for, and the potential consequences, as Mr Trump’s suspended “reciprocal” tariffs prepare to take effect. That will now not happen until 7 August.
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What does the UK-US trade deal involve?
Why was 1 August such an important date?
To understand the present day, we must first wind the clock back to early April.
Then, Mr Trump proudly showed off a board in the White House Rose Garden containing a list of countries and the tariffs they would immediately face in retaliation for the rates they impose on US-made goods. He called it “liberation day”.
The tariff numbers were big and financial markets took fright.
Just days later, the president announced a 90-day pause in those rates for all countries except China, to allow for negotiations.
The initial deadline of 9 July was then extended again to 1 August. Late on 31 July, Mr Trump signed the executive order but said that the tariff rates would not kick in for seven additional days to allow for the orders to be fully communicated.
Since April, only eight countries or trading blocs have agreed “deals” to limit the reciprocal tariffs and – in some cases – sectoral tariffs already in place.
Who has agreed a deal over the past 120 days?
The UK, Japan, Indonesia, the European Union and South Korea are among the eight to be facing lower rates than had been threatened back in April.
China has not really done a deal but it is no longer facing punitive tariffs above 100%.
Its decision to retaliate against US levies prompted a truce level to be agreed between the pair, pending further talks.
There’s a backlash against the EU over its deal, with many national leaders accusing the European Commission of giving in too easily. A broad 15% rate is to apply, down from the threatened 30%, while the bloc has also committed to US investment and to pay for US-produced natural gas.
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Millions of EU jobs were in firing line
Where does the UK stand?
We’ve already mentioned that the UK was the first to avert the worst of what was threatened.
While a 10% baseline tariff covers the vast majority of the goods we send to the US, aerospace products are exempt.
Our steel sector has not been subjected to Trump’s 50% tariffs and has been facing down a 25% rate. The government announced on Thursday that it would not apply under the terms of a quota system.
UK car exports were on a 25% rate until the end of June when the deal agreed in May took that down to 10% under a similar quota arrangement that exempts the first 100,000 cars from a levy.
Who has not done a deal?
Canada is among the big names facing a 35% baseline tariff rate. That is up from 25% and covers all goods not subject to a US-Mexico-Canada trade agreement that involves rules of origin.
America is its biggest export market and it has long been in Trump’s sights.
Mexico, another country deeply ingrained in the US supply chain, is facing a 30% rate but has been given an extra 90 days to secure a deal.
Brazil is facing a 50% rate. For India, it’s 25%.
What are the consequences?
This is where it all gets a bit woolly – for good reasons.
The trade war is unprecedented in scale, given the global nature of modern business.
It takes time for official statistics to catch up, especially when tariff rates chop and change so much.
Any duties on exports to the United States are a threat to company sales and economic growth alike – in both the US and the rest of the world. Many carmakers, for example, have refused to offer guidance on their outlooks for revenue and profits.
Apple warned on Thursday night that US tariffs would add $1.1bn of costs in the three months to September alone.
Barriers to business are never good but the International Monetary Fund earlier this week raised its forecast for global economic growth this year from 2.8% to 3%.
Some of that increase can be explained by the deals involving major economies, including Japan, the EU and UK.
US growth figures have been skewed by the rush to beat import tariffs.
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The big risk ahead?
It’s a self-inflicted wound.
The elephant in the room is inflation. Countries imposing duties on their imports force the recipient of those goods to foot the additional bill. Do the buyers swallow it or pass it on?
The latest US data contained strong evidence that tariff charges were now making their way down the country’s supply chains, threatening to squeeze American consumers in the months ahead.
It’s why the US central bank has been refusing demands from Mr Trump to cut interest rates. You don’t slow the pace of price rises by making borrowing costs cheaper.
A prolonged period of higher inflation would not go down well with US businesses or voters. It’s why financial markets have followed a recent trend known as TACO, helping stock markets remain at record levels.
The belief is that Trump always chickens out. He may have to back down if inflation takes off.
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