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AB 2000 studies

Alain Boublil Blog


The year of the Rat is arising well

On January 25th China will celebrate the Lunar New Year which, following the zodiac symbols, will be put under the “Rat” symbol. It is arising better than the “Pig” year which has ended, not because the country economic achievements have been disappointing but because the threats which were weighting on the international environment are lessening. The agreement concluded with the U.S. would be honored by both parts, at least until the American presidential elections. Instability in the Middle East should not generate a new oil crisis and a sharp rebound of oil prices, due to the glut of available resources. Growth in Europe, an important trade partner for Beijing, will remain mediocre but would not weaken to a point able to weight on China exports.

The announcement of a 6.1% growth rate has been accompanied with the usual negative comments, underlining that it is the lowest rate for thirty years. It would be better to hail the success of a country which, precisely during thirty years, never had growth rhythm inferior to 6%. GDP has over passed 14 000 billion dollars, consolidating China rank as the second world economic power. With the use of the purchasing power parity which correct exchange rates to take into account goods and services prices differences, China would really have over passed the U.S. whose GDP  in 2019, following the first estimates, has reached 21 300 billion dollars, an increase, in real terms, by around 2%. If that growth gap between the two countries hold steady, China could become, around 2030, the first economic power in the world.

Despite trade tensions with the U.S.; growth, during the 4th quarter has reached 6.1% and the rebound of industrial production (+6.9%) in December is confirming this trend. Due to Lunar New Year vacations and their breakdown between January and February, the next two months figures will not be very significant. It will be necessary to wait for the publication of the first quarter figures to assess if the favorable trend observed at the end of last year is confirmed.

These achievements must not hide that China is confronted with several major challenges. There is first the demographic transition. During more than thirty years, the State has dictated its only child policy to put the priority on the life level increase. Regarding this point, the success is not disputable since the per capita GDP has over passed 10 000$ in 2019. The ageing of the population risks to having, at the end, the opposite effect and the government has made its policy more flexible in 2016. But family habits are not changing overnight and the births number by 1000 inhabitants (10,5) didn’t enough recover. The objective of a better demographic balance is still a priority.

The excessive indebtedness of many enterprises supported by the State or by local authorities is real. But that doesn’t carry the risk to have the same consequences than in the U.S. During the “sub-prime crisis”, the American banking system had been put into trouble and that had been passed on the world economy. China has a structural external surplus and the central bank has accumulated more than 3 300 billion dollars of reserves in gold and in currencies. Authorities have enough resources to come to help affected institutions without calling foreign support, which makes the difference with other large emerging countries like Brazil. The multiplication of payments defaults must not be misinterpreted. It results from a political will. Time where there was an automatic public support of risks or of failures is over. Chinese authorities want to put economic agents in front of their responsibilities and to get closer to the developed countries practices, which is difficult to blame them.

The life level increase, which is continuous and irreversible, generates wages rises which are incompatible with the former economic model where China was the “factory of the world”. The transformation of the Chinese economy is under way and it is what worries Western countries which see appearing a competitor in the new technologies. Tens of thousands of young Chinese are going out of universities with highly qualified degrees. During the past, they frequently were looking for jobs in the U.S. or, at a lesser extent, in Europe. Now, they have at home major groups like Tencent, Huawei or Alibaba, capable to offer them strong carriers perspectives. The current country economic mutation doesn’t limit itself to get out of the role of low-cost sub-contractor of American companies or of a worldwide supplier to big retailers. Chinese brands are starting to emerge in the country where they are a sign of national proud and they will not be long to be recognized outside.  

China also engaged itself in a deep energy transition through putting the priority on two sectors, the reduction of the coal share in the power mix and the development of electric vehicles. Investments to facilitate natural gas supply are progressing with the putting into operation of the first pipe-line linking the country to Eastern Siberia. The construction of new nuclear plants and renewable, both wind and solar farms, is following a high trend. To the opposite, the significant fall, for two years of new cars registrations (-2.8% in 2018 and -9.1% in 2019) is frequently quoted to illustrate the Chinese economy difficulties. But growth had been so strong since 2010 to reach almost 29 million in 2017, that it is more appropriate to describe it as a consolidation. It is also the consequence of the attitude of many municipalities which, in front of the rise of the traffic and of pollution, are restricting the delivery of car registrations certificates. That must not conceal the breakthrough of electric vehicles. 700 000 have been sold in 2019, i.e. more than half the number of sales worldwide. The success was so high that the State has judged that generous subventions were not anymore useful and it has reduced them at the end of last year.  

China foreign policy must support growth, which is badly understood in Western countries, especially regarding the New Silk Roads program. Through the building of infrastructures linking the country to its partners in Central Asia, in Africa and even in the Mediterranean basin, it fulfilled in the same time three objectives. It provides to its enterprises activities which partly offset the growth slowing of their domestic market. It supports its partners developments which will become clients in the future and it makes easier the transportation of its exports. But these new roads are not one way and they also will make easier the development of exports to China.

The year of the Rat will inscribe itself in the continuity of previous years. China is changing. Its production model is transforming itself. Its enterprises are acquiring a reputation and a worldwide presence, to the point to become serious competitors to multinational firms which had dominated the world trade until now. The country is adapting its economy to all these industrial, technological and social transformations. Instead of having a critical look on these developments it would be more useful to try to understand them in order to avoid being a victim of them and to learn how to take advantage of them.               


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