The writer is Head of Emerging Markets Economics at Citi
Are all Chinese economic recoveries, like Tolstoy’s happy families, alike? Many observers these days seem to think so. The recent surge in metal prices, for example, reflects market confidence that China’s accelerating growth rate this year will cast the same benign shadow on the global economy as previous major recoveries. But that may not be the case.
The great Chinese economic recoveries of the last decade have been characterized by two characteristics above all: they have been stimulus-driven and investment-driven. The large amounts of support via credit markets and local government off-balance sheet financing vehicles were all generally focused on supporting infrastructure and real estate activities. Fiscal and monetary stimulus boosted investment spending.
This kind of pattern was most obviously apparent in the recovery from the financial crisis and the recovery from the collapse of China in 2015. In those years, other major economies did little investment thing themselves due to post-crisis austerity. policies after 2008 and the effects of the eurozone crisis thereafter. Thus, China’s investment spending has played a huge role in shaping global trade and demand for commodities.
China’s economic performance in 2023 will be different in that this year’s acceleration in growth will largely be the result of the country ending its lockdown approach to managing the spread of Covid. Thus, the economy will enjoy what is probably best described as a spontaneous recovery (not driven by stimulus measures) which will see the greatest effects on services and consumption (not investment) .
Why will monetary and fiscal policy play a more or less neutral role? On fiscal policy, a sharp rise in China’s budget deficits is unlikely as one of the reasons for the reopening in the first place is that Beijing has become a bit more worried about the debt stock. in the public sector balance sheet. It’s almost as if the government wants the recovery to fix its balance sheet problem, rather than using its balance sheet to fix the problem of the economy.
Similarly, further significant monetary stimulus is unlikely, since Chinese interest rates are already considerably lower than those in the United States, increasing the risk of further capital outflows if monetary policy is eased much further.
While there is not as much pivoting toward looser macroeconomic policy as in the past, another kind of pivoting is taking place these days: that of ideology toward pragmatism. Beijing is much less focused—for now—on “common prosperity” or “the disorderly expansion of capital”. The body language of Chinese policymakers towards the private sector is warm these days, even though the attitude of the authorities towards the real estate sector is still characterized by the slogan “houses are for living in, not for speculating”.
Thus, the hopes of a recovery based on stimulus and investment are likely to be disappointed. More Chinese households going to restaurants and theme parks will have much less impact on other countries than more high-speed trains or Chinese apartment buildings.
To put it more technically, the “marginal propensity to import” – the amount of each renminbi of spending that boosts other countries’ exports – is likely to be lower for Chinese services and consumer spending than for Chinese consumer spending. ‘investment. This is especially true for other emerging economies.
Another feature of China’s reopening this year merits consideration, namely its impact on the balance of payments. While China’s open borders obviously benefit traditional recipients of the country’s tourism largesse, its current account surplus could quickly disappear: Tourists spent $220 billion net abroad in 2019, and pent-up travel demand abroad should be high.
However, pent-up demand to park capital offshore will be just as high. The opportunities the Chinese have had to diversify their wealth internationally have been quite limited over the past three years. During this period, not only did the country’s real estate market lose its appeal as a reliable store of wealth, but the interest rate differential between China and the United States also turned sharply negative. Overall, the incentive to get out of the money is likely to be strong, which will likely inject some volatility into the renminbi’s performance.
Certainly the world is much better off with a Chinese recovery than without. But it’s best not to assume that this one will be like those that came before it.