The Chinese economy is recovering from the damage caused by its lengthy Covid-19 lockdown. Growth slumped in 2020 and in 2022 as the pandemic damaged economies worldwide.
The Chinese government – and many commentators – now see 5% annual growth as more normal than the considerably higher growth figures achieved in the previous decade. There was bound to be some slowing as the base of its economy grew significantly.
China has also encountered more push back, as its growth model rested heavily on investment in industry to export more to the rest of the world. President Trump and others challenged China’s policy of running a large trade surplus, claiming that the currency was too cheap – and its industry was favoured by subsidy and government support.
In the last two years, the official figures show China’s gross domestic product (GDP) rising 5.2% annually in 2023 followed by 5% in 2024. Beijing confirmed that the nation achieved its 5% target last year, but some observers in the West are sceptical about such a perfect outturn against the central government forecast.
The numbers had been weaker until the last quarter, but the figures were boosted by the old combination of industry and exports growing more quickly. Some of this is likely to have been increased Western demand for Chinese products ahead of a possible increase in US tariffs once Donald Trump is in the White House.
The Chinese government is not satisfied with the overall result or with the balance of the economy. Their stated policy is to relax more to promote consumer led growth, enhancing the rewards for their workforce after years of relatively low pay to produce cheap goods for the rest of the world.
Chinese policy
The Peoples Bank of China has reported on a year where inflation stayed low and monetary policy was relaxed a little. Broad money, or M2 to economists, grew at 7.2% last year, with narrow money, or M1, felling 1.4%. Bank lending grew by 7.2%, with deposits increasing by 6.4%. The monthly, weighted interbank interest rate ended the year at 1.57%. Interest rates were brought down gently over the year and the reserve ratio requirements placed on the commercial banks were relaxed.
The authorities have been battling the twin problems of excessive debts incurred by local government and by the property sector. The government has recently made an additional 10 trillion renminbi available to local governments. Of this, 4 trillion renminbi is in the form of bond finance to refinance old debt, and 4 trillion renminbi is the increase in the sector’s collective debt ceiling. The government claims that the problems of debt are concentrated in some of the poorer provinces. It said there are now policies to restructure and control the debts better in future.
We have seen bankruptcies in the property or housing companies as the government has been reluctant to subsidise companies that over traded. Now it wishes to stimulate house buying some more, helping to take distressed stock off the industry. It has deposit rules and reduced mortgage rates.
The government is allowing some higher wage settlements to get some increases in real incomes. It is offering some subsidies to encourage trade in of vehicles and appliances for new ones.
Beijing’s financial plans
The governor of the central bank, Pan Gongsheng, seeks an accommodative monetary policy to boost growth and support the government policy to increase consumer demand. He wants to improve financial market governance and official communications to markets, with more managed input from markets into rate and price determination.
Mr Gongsheng wishes to help bring down the risks of local authority and property financing. He drew attention to the lower trade surplus and stated it did not want to increase that. He commented on a relatively weak currency, claiming he wants stability, but pointing out markets have more influence now on the rate. These latter comments look defensive ahead of President Trump deciding on whether there does need to be much higher general tariffs against Chinese goods.
Mr Xi seeks to export Chinese dominance in green technology to all parts of the world.
The governor stressed that the People’s Bank of China still wanted Hong Kong used more. It wishes the territory would be more connected to the Shanghai markets. It wants to develop offshore renminbi trading and build up its role as an investment management centre.
President Xi’s vision
President Xi Jinping set out some of his thinking in the meeting with President Biden in November and at the BRICS conference in October. To both, he says he wanted peace and development. He favours win/win co-operation with the US. He intends to help the BRICS meld into a powerful voice for the global south – and press for changes to global governance to reflect the growing power and size of the emerging world.
Mr Xi seeks to export Chinese dominance in green technology to all parts of the world. He is developing Chinese/BRICS institutions to share and advance AI and digital technology, and to develop an alternative financing and currency system to the dollar-based global commercial banks. He is not ready for aggressive competition with the US. He is building a larger military capability with ships, planes and missile systems that can be deployed well beyond Chinese territory.
How will China respond to President Trump?
Beijing will have plans based on its experience of handling President Trump’s past challenges to them over a weak currency, rigged trade and the need for protective US tariffs. It will mount a defence of their actions, seek to avoid provocative increases in the trade surplus or further devaluations of the renminbi, whilst explaining moves to date as being the results of market pricing and efficient production.
It will retaliate against any new US tariffs and may retaliate hard if the US goes for a high and widely based tariff hike. Beijing will seek to mobilise world opinion against the USA if the tariff rises hit others as well. A tariff war between the two largest economies in the world is a negative for both. So, President Trump is likely to be looking for a deal where he can claim a win.
The political risks of investing in China
There are Western investors who refuse to consider Chinese investment. The Chinese approach to some of its workforce and minorities, its attitude to free speech and human rights leads some environmental, social and governance (ESG) oriented funds to rule it out. Others rule it out on the broader political concerns.
With so much business either state owned or subject to substantial state regulation and direction, Western shareholders can never be sure what return they will be allowed to earn or what new government requirement might suddenly be imposed. This is an authoritarian state that has different views of private property and investment law to the West.
Chinese shares have not been a good long-term investment – from the market high of 2007 despite the very good growth performance of the economy over the last twenty years. It has been possible to make money from time to time by buying after a big fall if you remember to sell when the market has done better.
Conclusion
It looks as if China wishes to grow its economy and its military more before considering contested moves against Taiwan or other territories it seeks to control. President Xi will probably seek to contain damage from more tariffs and is pursuing his Plan B of trying to grow domestic demand more than exports.
The Chinese economy should be able to grow around its current official pace this year, with help from further modest stimulus packages. The state may well like to see the equity market up a bit, as it seeks to build its position in international finance.
The policy and economic background favours some appreciation in asset values. They will remain at a global discount given the political concerns of many investors. President Trump will likely increase worries about China as part of a campaign to change their approach to industry and exports.
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How will China respond to President Trump?
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