China wins the game on the world economic board

Robot unveiled at the China International Industry Fair in Shanghai on September 15 Zhai Huiyong (Getty Images)

All the wide avenues of Haitang - a brand new beach town on the Chinese island of Hainan, whose palm trees, luxury hotels and stunning buildings evoke Miami - end up leading to the same place.

A huge complex, built in glass and steel, of duty free sales, in which there is not a single global luxury firm.

The covid-19 pandemic has passed through here by glancing at it, leaving no trace other than the temperature controls at its entrances and the masks that everyone wears.

After the months of hiatus forced by the coronavirus, the consumer frenzy has returned by virtue of its jurisdiction.

It's Monday, but it doesn't matter.

Many of the thousands of tourists that crowd the aisles have chosen the island for their vacations precisely to be able to buy here, attracted by the prices without the very high rates that the Chinese government imposes on foreign luxury products.

Faced with the prospect of a bargain, precautions about physical distance do not exist.

Groups of exquisitely manicured girls crowd the shelves of cosmetics — more than one will do business by reselling them when they return home;

families in sandals record their flight details to pick up their purchases at the airport;

women with a face of concentration check on their mobile how much they save before choosing a bag, shoes or earrings.

The desire to spend is palpable.

They are scenes unthinkable right now in other parts of the planet.

The Chinese economy is the great exception this year among the main global markets, devastated by the covid-19 pandemic.

The IMF foresees a global contraction of 4.9% in 2020, which will be -8% in the United States and will plummet to -12.8% in Spain.

But in China, the effect of the coronavirus seems to be long gone.

His recovery has come earlier and faster than the most optimistic estimated.

IMF experts predict that its GDP will increase by 1%.

A far cry from the 6% Beijing aspired to before the crisis broke out, but quite a change from the outlook in the first quarter, when its economy contracted by 6.8%, the first setback since the death of Mao Zedong in 1976 A source of satisfaction for Chinese leaders, who can boast of management to their citizens.

Indicators

The curve of its GDP already draws the longed-for recovery in V that for the moment escapes the rest of the countries.

Investment in fixed assets increased 9.3% in August compared to 8.3% the previous month, and industrial production 5.6% from 4.8% in July.

The main real estate groups registered a 30.7% increase in the sale of homes.

That of automobiles, 6%.

Even movie theaters, which on September 26 will expand their capacity to three-quarters of the capacity, already put their revenue share at 90%.

Other indicators also point to activity at previous levels, or even higher than those of the pandemic: electricity consumption, which had plummeted during the February and March break, grew by 0.5% in the first nine months of the year. year compared to the same period in 2019.

Even consumption, which has so far lagged behind industry, has begun to show encouraging signs as the recovery has taken hold and, with it, the confidence of citizens.

Expenses such as those of

visitors

to Haitang have led to a rebound in retail sales for the first time this year, 0.5%, after losing 1.1% the previous period.

A positive sign, although the gap with the growth of the production sector continues to widen.

The key has been, in the first place, the rapid control of the pandemic.

After a disastrous start, the Government decreed harsh confinement measures, unprecedented in recent history and which in another country until then would have been unthinkable.

In April, almost three months after imposing it, the blockade of Wuhan was lifted;

This September, according to official data, the entire country has completed more than a month without local infections, which allows a practically normal life.

In addition, to breathe new life into an economy in a coma like the one China presented in March, Beijing opted for a battery of measures to support the production sector.

The priority was to protect employment, fundamental for a government whose main goal is social stability: it had gone from an official unemployment rate of 5.2% in urban areas to 6% (that is, five million people lost their jobs. job).

The actual figures may have been even much higher since official data does not account for unemployment among the millions of rural immigrants from inland China, the workforce that sustains factories in the prosperous coastal area.

Credit and subsidies

Thus, the Government applied the same formula that it had used in the past: credit and subsidies to companies, incentives that have given priority to public sector investment in areas such as logistics and infrastructure, which are great generators of jobs.

Qu Hongbin, chief China economist at HSBC bank, estimates that in the second half of the year infrastructure spending will grow 15% compared to last year.

The formula has aggravated imbalances that already existed.

As in other countries, lower-income households have suffered more from the impact of the crisis: only a fifth of the officially unemployed received unemployment benefits;

small companies face greater difficulties than large ones, especially in the service sector.

"The gap in income and consumption between wealthy residents and those with lower-middle income is increasing dramatically," warned last month in a speech Wang Xiaolu, deputy director of the National Institute for Economic Research think tank.

The result is, at least for now, an uneven recovery, much more supported by production than consumption.

This item could take time to recover to previous levels, given that lower-income households have not yet recovered from the initial impact of the pandemic.

In fact, the rise in retail has been driven by high-end and non-essential products such as cosmetics, jewelry and electronics;

while food, clothing and other everyday items have been stable.

If the increase in vehicle purchases is eliminated from the August results, retail sales enter negative growth, -0.6%.

Although asymmetrical, the recovery will continue in the coming months, according to all indications.

Ma Jun, advisor to the People's Bank of China (PBOC, the central bank) predicts a GDP growth of 6% in the fourth quarter, and a normalization of macroeconomic policies in the first of 2021. “People underestimate the power they have political leaders in China to stimulate demand and make it reactivate, ”Mark Williams, chief economist for Asia at the consulting firm Capital Economics, said in a videoconference.

"China will return to something similar to normal faster than many expect, and we are already on that path," he predicts.

Within China, the figures have reinforced the message of the Government, which comes to convey that “the Chinese model is better than any other.

Therefore, we must intensify it, continue with this model led by the state, "adds Williams.

Precisely this remodeling of the particular system of Chinese state capitalism is going to be one of the priorities in government management in the immediate and medium-term future.

Next month the Central Committee of the Communist Party will hold its annual plenary session.

There he will draw up the master lines of the XIV Five-Year Plan that will direct the world's second economy between 2021 and 2025;

of the "China 2035 Standards" plan, and of other projects with which Beijing wants to become a country of "wealth and power" in fifteen years.

The mantra of that key meeting, behind closed doors in a hotel in northern Beijing, will be "dual circulation" or "dual circulation."

This concept, about which very little is still known, first came to light at a Politburo meeting on May 14, chaired by Xi Jinping.

It pointed out the need to “completely extract the window of China's enormous market scale and the potential of national demand to establish a new development pattern that includes dual circulation between the interior and the exterior, in a mutual complementation. ”.

Alicia García-Herrero, chief economist for Asia at Natixis, explains that this theory “is based on the one hand on maintaining integration with the rest of the world;

and on the other, to increase the strength of domestic demand while reducing dependence on imports, ”especially technology and other high-end manufactured products.

"Economic protectionism, in short," he concludes.

At first glance, the new model is not a groundbreaking proposition.

Since the time of Hu Jintao and Wen Jiabao (2002-2012), there has been talk of the need for a new growth model that places more emphasis on domestic consumption and less on exports.

After all, domestic consumer spending still only represents 38.8% of Chinese GDP, compared to 66% in the United States.

Trade war

But this is not simply the same dog with a different collar.

The “dual circulation” strategy is also a reaction to current external conditions: to the increasingly sour relationship with the United States, to a trade war that - although now on forced pause - may return at any moment, and to a decoupling increasingly marked technological.

The once cordial relations with other economic partners, such as the EU, Australia or India, have deteriorated markedly, if not turned completely hostile.

It is a very different situation from the one China faced in the 2008 crisis, when multilateralism was still a buzzword.

“On the international scene, the world has begun to be more cautious about the rise of China.

Confrontation has reached an unprecedented level during the pandemic due to incidents involving Hong Kong and the South China Sea.

For this reason, the Government anticipates that it will have to deal with an increasingly hostile international environment, ”says Professor Xu Bin, from the CEIBS business school in Shanghai.

“This time - compared to Hu and Wen times - the notion is to ensure that more of the increased demand is covered by domestic production rather than imports.

In this sense, the dual circulation strategy is a corollary of Made in China 2025, the Government's previous program to improve Chinese technological capacity, as it has made it possible to replace high-end products only thanks to progress in key sectors ”, García-Herrero adds in a note from Natixis.

This, the expert specifies, will raise concern in South Korea, Japan or Germany, important suppliers of intermediate goods to the Asian giant.

But while trying to evolve its own companies and sectors, China maintains important ties, and dependence, with foreign firms to cover their basic needs, from food to technology.

In Shanghai alone, the activity of these companies contributes a quarter of GDP to the city and a third of its tax collection.

And much of China's recovery this year has been due to the strength of its exports during the pandemic.

A turn to something akin to autarky would spell economic disaster, something that Beijing - and the mastermind behind the new policy, Xi's deputy prime minister and henchman for economic affairs, Liu He - are fully aware.

The Party has reiterated on each occasion that the process of opening its economy abroad will not stop, but will continue to advance.

"I have assured on several occasions that the open door of China will not close, but will open more and more," Xi said during a meeting with entrepreneurs.

While waiting for the plenary session next month, and to learn more details, the “double circulation” strategy raises a whole series of questions.

Among them, what exactly is Beijing going to do to encourage domestic consumption.

In some respects, things have started to move.

The Chinese authorities have, for example, presented ambitious plans to create tax-free zones throughout the country, similar to those in Haitang, which make hitherto prohibitive luxury products within reach of the less well-off.

Hainan, the island where Haitang is located, plans to become a special free trade zone.

Xi has also alluded to the need to improve logistics chains within the country to unify the domestic market.

Although this is reduced, almost, to mere anecdotes in the face of the great underlying problem: stimulating consumption, a problem that requires far-reaching structural reforms so that rural immigrants and the most disadvantaged layers obtain higher incomes and, with it, increase their income available.

About 130 million people, or almost 10% of the Chinese population, live in relative poverty - they earn less than 40% of the median income, which is equivalent to incomes of less than 5,000 yuan or 625 euros, per year - according to the research of Professor Li Shi, from Zhejiang University.

Up to 270 million rural immigrants lack internal residence permits in the cities where they live, which denies them full access to basic social services such as education or health.

It is essential to tackle unemployment: although unemployment has improved since the worst days of the pandemic, until August only eight million jobs had been created this year, two million less than last year;

youth unemployment continues to rise.

Perhaps that is why, although the virus has forced Beijing to renounce one of its great goals for this year, doubling average income compared to 2010 levels - it will be achieved next year, they say - it does maintain the second: eliminate rural poverty by the end of this year, which in December 2019 still officially suffered 5.5 million people.

A goal that has been given a new push in the second half of 2020.

But experts warn of the difficulties in reconciling a priori contradictory objectives.

“Stimulating consumption, or internal circulation, depends on policies that would increase wages and employee benefits but in a way that would endanger dual circulation, that is, less competitiveness of exports.

The dual circulation strategy is indeed incompatible, ”wrote George Magnus, a research associate at the China Institute of the School of African and Oriental Studies (SOAS) in London, on the institution's blog.

Private sector

In this reshaping of the economy, it is also key to strengthen the private sector, which Prime Minister Li Keqiang specified in August has created 90% of new jobs this year.

Many companies are still used to mass production, and they hardly invest in innovation, design or marketing.

How this support will be carried out remains to be clarified, although last week the Communist Party issued a series of guidelines for the "healthy development of the private sector," promising aid to these companies while advancing a greater role for the CCP in your guide.

The "United Labor Front", the arm of the party in charge of relations with companies and social entities, should "be aware of the development and demand of private firms," ​​reported the Chinese state agency, Xinhua.

The indigenous technology sector will be boosted, in light of the intense disputes with the United States for supremacy in the sector.

The veto on the supply of components for Huawei has already started to stimulate the development of its own semiconductor industry.

What seems to be moving away is the prospect of liberal reforms, the kind that Washington calls for in the trade war.

The push to develop the domestic market and the successful recovery "makes it even less likely that we will see the kind of reforms that the United States has been pushing for, to achieve more liberalization," says Williams, the Capital Economics expert.

In August, Xi Jinping visited the Magang steelmaker, one of the oldest in the country and which, after its merger with rival Baowu last year, has become one of the largest Chinese state-owned companies.

It was his fifth visit to a public company this year, in a sign of the Chinese leader's support for the state sector and his vision of these companies as vectors of innovation.

“Private companies are still welcome, in fact China needs their innovation and growth potential more than ever.

But at the core of the economic system will remain a base of strategically and politically controlled industries ”, pointed out then the analyst Nils Grünberg, from the German think tank Merics.

Sweet time for forex

The good performance of the Chinese economy has been reflected in the evolution of its currency.

Since May, the renminbi has gained 5% against the dollar.

Today, 6.75 yuan buy a unit of its American equivalent.

This is the highest level since early 2019. "With China on track for a steeper recovery than elsewhere, its strongest external position in a decade, and its domestic bonds unusually attractive by global standards, there is still room for further progress." predicted a recent report from Capital Economics.

This revaluation will lower imports and reduce inflation, which in turn will stimulate domestic consumption, one of the most important metrics in order to achieve a full recovery.

Gone is August of last year, when in the hottest days of the trade war, China chose to devalue its currency, crossing the barrier of 7 yuan per dollar for the first time in 11 years;

movement that led the US to describe the Asian giant as a "currency manipulator".

That figure, however, was closer to the market value of the renminbi, which for years has remained above its real exchange rate as a result of government action.

The carbure exporting machine

In the midst of a pandemic, and when the world enters an economic downturn of alarming dimensions, China, the world's leading exporting power, has not only managed to maintain, but has also increased its sales volumes abroad.

In August, it exported goods worth $ 235.3 billion, a 9.5% jump from the same month last year.

It was the third highest level since the records began and the highest since November 2018, before the trade war with the United States reached all its starkness.

It was not an anomaly: a month before, the figures were similar.

A 7.2% year-on-year growth for exports, a 1.4% contraction for imports.

With these data, China has achieved a formidable current account surplus of $ 58.9 billion.

Despite the debates about the possibility of an at least partial decoupling of the two economies, especially in the technological area, and despite the tariffs that weigh on most of Chinese goods as a result of the trade war, more than half correspond to its bilateral exchanges with the United States, 34,200 million, the second largest in history in the commercial relationship between the two.

Several factors have allowed China to continue its strong sales volume.

On the one hand, the pandemic has unleashed the demand for medical protection products, as well as electronic consumer goods, both to respond to the needs of teleworking and to alleviate isolation in confined homes.

Throughout the crisis, the Asian giant maintained a high level of production to maintain employment, as far as possible.

On the other hand, the reopening of economic activity in other Asian markets has accumulated a demand that now needs to be satisfied.

And also, the halt in production in other countries has meant that companies that may have been supplied elsewhere have turned to the country chaired by Xi Jinping for their purchases.

"The pandemic has highlighted the degree to which the United States and the rest of the world depend on Chinese exports," said Mark Williams, chief Asia economist at Capital Economics.

“China exports the products that everyone has been buying these last six months: medical equipment, masks, PPE and, of course, the kind of electronic goods that many people have needed to work from home.

So since April we are seeing these really very high export figures, ”he adds.

The rise is all the more striking in that exports had been gradually falling as a percentage of Chinese GDP.

If in 2006 they reached 35%, in 2019 that proportion had dropped to 17%.

The big question is whether, despite forming the "external circulation" of the new Chinese growth strategy, exports will continue with the same momentum in the coming months.

Domestic demand is still weak in China, as highlighted by fragile figures for retail sales and imports.

Purchases from the EU fell 6.8% in August, while purchases from Japan and South Korea fell 1.4% and 4.1%, respectively.

"With Beijing using investments and exports to seek increased employment, the rest of the world will have to absorb the excess Chinese" production, says in an analysis Merics, the German think tank specialized in China.

"However, this may not be sustainable for long, as demand is not strong elsewhere, and contrary to that other governments may be tempted to assist their domestic industries through trade measures to support employment," he continues.

Xi himself, during his visit to Anhui in August, mentioned that China "faces an external climate in which the global market is shrinking."

An editorial in the Cantonese magazine Southern Reviews, distributed by Xinhua, published that “Beijing does not give up international trade, but when external demand is decimated by COVID and protectionism, 'internal circulation' is the way to go for that the Chinese economy continues to advance ”.

Beijing's promises that it will continue to open up abroad, however, find an increasingly cold reception among foreign businessmen - and governments -.

The “outside” companies barely manage to have a presence in sectors such as energy or finance.

There is a "fatigue of promises", the fatigue of waiting for reforms and an opening that equalize the playing conditions in the appetizing Chinese market, denounces the president of the European Chamber of Commerce in China, Joerg Wüttke.

Although Beijing has gradually opened some sectors, that institution laments, by the time it has done so it has been so late that the market was already full.