China is at the front of the daily scene for months. Its economy is slowing, the trade negotiations feature with Washington is taking financial markets under tension, the political crisis in Hong Kong is generating lively critics from Western countries. But the place the country is now occupying on the international scene is just the consequence of its growing weight on the world economy.
The Hong Kong crisis is the result of the awkwardness of local authorities and of Beijing refusal to deplore them. The last Sunday elections represent a major disapproval for these authorities but they won’t have any institutional consequences because their purpose was to choose the equivalent in France of local representatives. Chinese political leaders are taking advantage of their good unfolding to proclaim that the principle “one nation, two systems” is perfectly working. The vote by the American Congress of a law regarding public freedoms in Hong Kong and immediately signed by Donald Trump has appeared as a support to demonstrators and will create new tensions between the two countries when they have already difficulties to reach an agreement regarding their trade relationship. The American president may also want to divert the attention when the inquiry about the Ukrainian affair put him in the front line.
That political crisis is heavily weighting on the economic activity. Rich Chinese people who came to Hong Kong to make their luxury products purchases are taking out of the territory and shops are beginning to close. The Yuan internationalization and the development of Shanghai and Shenzhen markets places are downgrading the role of the former British territory and making it less strategic. Yet Beijing, through the development of infrastructures around the Pearl River delta with Macao and the Guangdong province wanted to use their complementarity and to accelerate the development of the whole area. When Alibaba, after its listing in Wall Street has chosen to be also quoted in Hong Kong and to rise near 10 billion dollar that was corresponding to the same integration project where everybody would be a winner. It is difficult to imagine that the last Sunday vote conveys a rejection of that policy and that it reveals an isolation will which would have, on the economic ground, no sense and whose inhabitants would be the first victims.
The trade negotiations feature with the U.S. must not also be interpreted as a significant threat on Chinese growth. Beijing benefits from a double advantage on Washington. China has accumulated huge external surplus which went in the reserves of its Central Bank. To the opposite, the U.S. has a high deficit. They need foreign capital to finance it. In that case, Beijing has all its time when Washington is confronted to an election which is coming sooner, day after day. A failure in these discussions would provoke a stock markets fall about which the American president is especially sensitive. It is for that reason he has reduced his ambitions in saying that they will have a “Phase one” covering a much narrower field than initially envisioned about which it will be easier to reach an agreement.
This one is not yet acquired and the serious diplomatic incident regarding the Hong Kong Law will certainly make the situation more complicated. But in case of a failure, China will be less affected than the U.S, as a report from the New York Federal Reserve has just pointed out. The increase of Customs duties will be passed on American consumers because multinational firms are not ready to transform their supply chains. Regarding Chinese companies like Huawei, under the threat to be cut off from their American suppliers, they are reorganizing their business and they look at Europe and even at Japan, which is a height when we know the history of the relationship between these two countries.
None of these points is really hurting the dynamism and the potential of the Chinese economy. If its growth rate is diminishing, slightly, it is for arithmetical reasons. The size of the economy has reached such a high level that in absolute value a 6% growth rate today corresponds to a wealth creation much higher than an 8% or even a 10% rate, as ten years ago. It would be better to notice that if the 6% rate is the lowest for 25 years, it means that during that period, the growth rate has always been superior to 6%. It is difficult to find a country which achieved a better result. Growth is staying strong but its composition is changing. There is still the building of highways and high speed railways tracks, or major petrochemical complexes as the one the German group BASF has just inaugurated last week. But the engine of the Chinese economy is now household consumption. The spectacle given by big metropolis and especially Shanghai with its huge malls, its pedestrian streets with its shops is revealing, as the queues to go to a restaurant or to take a plane.
A recent paper in China Daily tells that in Shenzhen, the district around Huaquiang North Street which was known for its shops where we can see the latest smart phones or the most advanced connected products is going through a profound change and that there are now much more beauty salons and cosmetic shops. The consumption of these products and services is increasing by 12.8% since the beginning of the year. That well illustrates the transformation of the Chinese economic model and its integration in the world economy. China used to be a step in the production cycle. It was the factory of the world, taking profit from a low-cost and well-trained working force. The country is becoming both a starting and an arrival point for finished products. That makes necessary a disruption of merchandises flows and it is the whole signification of the major strategic program of the Chinese government, the Belt and Road Initiative, which is a modern version of the antic Silk Roads.
The mobilized financial resources to achieve these investments allow supporting the country growth through a pure Keynesian logic but they also favor the neighboring countries development which will profit from these infrastructures. Critics we hear in Europe are incomprehensible. These projects will make easier Chinese exports. But the ship and the trains have no reason to come back empty. They will be able to carry at a lower cost and more rapidly European products. So Beijing and the countries which participate to these huge projects are financing exchanges in both directions. It is the duty of French companies to take advantage from that. The trial which is brought about these investments in developing countries, notably in Africa, is even less understandable. Beijing would weaken their financial situation through an incentive to become more indebted. But Europe, and especially France, is in a very poor position to raise these critics. If we had helped these countries to develop, they wouldn’t need to ask for agreements with the Middle Empire.
China has not finished surprising us. The adoption of consumption models close to our ones constitutes a powerful support to Chinese growth. It also opens opportunities for our enterprises. It is necessary they accomplish first the necessary efforts to make them known through their brands and to adapt their supply to the demand of their prospective Chinese customers.