Rumours of China’s economic resurgence are greatly exaggerated

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John Rapley is an author and academic who divides his time among London, Johannesburg and Ottawa. His books include Why Empires Fall (Yale University Press, 2023) and Twilight of the Money Gods (Simon and Schuster, 2017).

If you’d invested $100 in the Chinese stock market at the start of last week, you’d be nearly $25 richer today. When the Chinese government decides to jolt its moribund economy back to life, as it did with an injection of stimulus to markets last week, it doesn’t take half-measures.

With interest-rate cuts, liquidity-support measures and what amount to some targeted bailouts for indebted local governments, the Chinese authorities pumped money into stock and property markets, leading to a sharp run-up in prices. The fact that the ruling Politburo held an emergency meeting to do so has been taken as a signal by some analysts that the government is getting serious.

And that might give the rest of the world a lift. If what the world’s second-biggest economy did last week is just an entrée ahead of the main course, the global economy may be able to look forward to an early Christmas gift from the East.

Still, as dramatic as the turnaround has been, it’s too early to say the Chinese economy is roaring back to life.

Although China’s annual growth rate, just shy of 5 per cent, which is considered the floor by domestic authorities, might be one that Canadians dream of, Canadians have a lifestyle most Chinese dream of. Despite moving to the forefront of technological innovation, China is still a developing country. With a per capita income roughly a third of Canada’s, China is still playing catch-up, and doing so more slowly than 15 years ago, when its annual growth rate was pushing 15 per cent. Given how rapidly China is aging, there’s a growing fear that the country may now never draw level with its Western rivals.

If the ruling Communist Party is to fulfill its implied social contract with the people, whereby they trade individual freedom and democracy for Western-style standards of living, it must find a way to restore the country’s dynamism. China’s basic problem is that its economy is unbalanced. The country initially followed the path of other successful East Asian developers, such as Japan and South Korea, and industrialized rapidly by repressing wages and thereby steering nearly half of the economy’s output to reinvestment. It then used that investment to build export industries that sold to the world.

But with much of the world now turning against globalization, it’s getting harder for China to keep exporting its way to growth.

That wouldn’t be a problem if China now did what Japan and South Korea did when they reached the middle-income phase of their development, whereupon they reduced investment and raised wages, thereby creating a large internal market for the country’s industrial output. However, faced with its own moment of transition, China looks paralyzed.

Whether unable or merely unwilling, the Communist Party is struggling to make the transition to a consumption-based economy.

You wouldn’t want to stay up nights expecting Santa just yet. As dramatic as the turnaround has been, it’s coming off a very low base. Despite last week’s surge, the Shanghai stock index would still need to almost double before it reclaimed the highs it reached in the glory days, prior to the 2008 global financial crisis. The same goes for property prices, which in real terms are 10 per cent lower than they were at their 2021 peak. Given that real estate is the most common means for Chinese households to put aside savings, they have a way to go before they feel rich again.

At best, many people look at their investments and regard last week’s measures as merely a reduction to their losses. Retail sales have barely budged this year in China, and there’s little in the measures that will encourage ordinary Chinese who are still underwater to go shopping again.

So far, therefore, this intervention has only just provided glimmers of hope, leaving market analysts around the world watching and waiting, hoping another Chinese shoe will drop in the coming weeks. Unlike in 2008, when China’s massive public-works program created so many jobs, and thereby so much new buying, that it helped lift the world economy out of its recession, these measures have scarcely registered outside of China. Stock markets in the rest of the world have hardly budged, reflecting the expectation that this stimulus won’t do much.