Three Quarters, Three China Myths – OpEd

During the year, international media has charged China for global inflation, deflation risk and now, economic collapse. Yet, Chinese recovery is likely to broaden in the second half of the year. So why the myths?

According to reputable international media, we live in a new world in which China’s economy no longer exists. It has collapsed. Here’s a sample of past month’s main headlines:

“China’s economy is in trouble” (Politico, Aug 18)

“China faces a Japan-styled ‘lost decade’” (Fortune, Aug 29)

“How do we manage China’s decline?” (New York Times, Aug 29)

“China’s economy shows fresh weakness in factories, housing and consumer spending” (Wall Street Journal, Aug 31)

“Kyle Bass says China’s economy is ‘circling the drain’” (Bloomberg, Sep 11)

“China’s economy hits turbulence” (CNN, Sep 12)

“China’s economic collapse carries a warning about our own future” (Hill, Sep 13)

Information war
Obviously, a random sample of headlines cannot account for nuances. But it can illustrate the problem. Information war is the new normal in international media. Contrarian voices are not just marginalized, but algorithm-excluded. Also, the line between ideologies and facts has blurred. The New York Times columnist Bred Stephens believes China’s economy is on secular decline, seems to deny climate change and promotes neoconservative foreign policy. In the process, anti-science militarism is presented as a voice of reason.

Moreover, the interest conflicts of some ‘opinion leaders” are obvious. The Hill’s Peter St Onge is a fellow in the Heritage Foundation, an activist neoconservative thinktank. Bloomberg’s China interviewee is Kyle Bass, a member of several anti-China groups (including the geopolitical Quad Fund and the uber-hawkish Hudson Institute funded by Exxon Mobil and Koch Family Foundations) who has for years (unsuccessfully) used his hedge fund to bet against China and the yuan. Bass’s alleged stock manipulation has been scrutinized by US regulators and Wall Street Journal,

And then, there was the bizarre Newsweek’s piece (Sep 5) suggesting that Shanghai “has turned into a ‘ghost town’,” due to China’s economic collapse. It built on a tweet by Michael Yon, who cites a mystery “friend from China.” Yon is an ex-member of US Special Forces who reportedly spent more time “embedded with combat units” than any other journalist in Iraq and has popped up in destabilized targets from Afghanistan to Hong Kong in 2019.

In January 2021 he did not attribute the US Capitol attack to white nationalists but to the anti-racist Antifa, according to far-right, pro-QAnon media. His credibility has been challenged by US media and even the Pentagon.

Three China myths: Inflation, deflation, and collapse
Setting aside the ongoing information wars, media trolls and the China collapse myth, what are the facts?

When Chinese policymakers began to reopen the economy early in the year, international observers warned that the world’s second-largest economy would turn into a global inflation threat. There was a problem with the narrative. Numbers didn’t back it up, as I showed in an op-ed in early March.

And so, a quarter passed. Then the international pundits turned their previous narrative upside down. When Chinese inflation rate was flat in June, these oracles testified that China was facing an impending deflationary crash.

But was China really a global deflation risk? That presumes that Chinese price levels reflect a sustained fall; and that such deflation is somehow exported worldwide in a sustained manner.

In reality, the deflationary preconditions were not in place. I predicted that despite international headwinds, China’s “rebound is strengthening… and economic recovery is likely to strengthen in the second half of the year.”

And now that seems to be the case.

Economic rebound broadening
The better-than-expected economic data in August suggests that China’s economic recovery is strengthening. On the supply side, the industrial value-added recorded a 4.5 percent year-on-year increase. On the demand side, retail sales, a main gauge of consumption, beat expectations following the summer travel peak and consumption-boosting measures.

In the coming quarters, the rebound is likely to further improve on stimulus, including the increase in tax allowances. And early signs suggest that consumption recovery will accelerate in the upcoming National Day holidays.

The key issue for domestic recovery remains the ailing property market. The policymakers hope to restore consumer confidence in the sector through reduced down payment ratio and a floor on new mortgage rates. These are right steps but more will be needed in the ailing sector.

As recovery gathers pace in the first-tier megacities, policymakers also hope to see positive spillover effects in other cities and regions. Working-age jobless rates are at nearly pre-pandemic levels and rising incomes are boosting above-average deposit levels.

Hovering at 20 percent, the rise of the youth unemployment correlates with the timing of the trade wars and geopolitics, which foster instability and uncertainty penalizing investment and hiring.

Supportive fiscal policies remain warranted, as well as accommodative monetary stances. On Friday, the People’s Bank of China (PBOC) kept interest rate unchanged but boosted liquidity through medium-term lending. Some saw this as inadequate, yet PBOC may be able to delay rate cuts, due to strategic investments in new economy, including electronics and software; infrastructure investments in electricity and railways; and car companies’ rising capital expenditures in electric vehicles, whose sales are booming.

Furthermore, the sharp, geopolitically-induced downturn in semiconductors may be bottoming out. Moreover, Huawei’s impressive 5G Mate 60 suggests that Chinese tech self-sufficiency may be growing far faster than expected.

Challenging global headwinds
The challenging external headwinds reflect some moderation, for now. As long as the West’s geopolitical unilateralism and protectionism prevail, global demand is likely to remain sluggish weighing heavily on global recovery.

The Eurozone has been coping with recession. The UK is amid its disastrous Brexit aftermath. US economy is flirting with recessionary risks. And Japan’s rising debt continues to maintain persistent stagnation and deflation.

In China, growth could still reach 4.5 to 5 percent in 2023. Amid (unwarranted) trade wars and geopolitics targeting the mainland, it would be an impressive achievement.