China’s latest trade data almost seems designed to make Donald Trump’s head explode.
As the former US leader clamors for relevance from his Florida lair, Beijing reminded us how much of a bust the trade war on which Trump pinned re-election really was. Though the US economy shows signs of stabilizing, China’s exports surged nearly 61% year-on-year in the first two months of 2021.
That shows two things. First, China is the vanguard of the global recovery. Second, Trump, in the end, barely laid a glove on Asia’s biggest economy.
But a third element might matter most to the global financial system. It’s how President Xi Jinping appears to have internalized the fallout from four years of trade warring – and pivoted accordingly.
There are ample reasons to argue China’s trade surge isn’t all it seems. The numbers may be skewed by the comparable year-earlier period when Covid-19 was ravaging China. And quirks related to the timing of Lunar New Year holidays tend to upend data sets.
Even so, there’s no doubt that China is the closest thing the globe’s top economies have to a “V-shaped” rebound. Why, then, might Xi’s team seek to engineer more of a “U-shaped” return to stability?
The experience of the last four years, that’s why.
Xi is not Hu
There’s been much chatter about China’s option not to announce a firm growth target this year. And Xi’s team thinks 6% growth, a tantalizingly modest goal for Beijing, is just the thing.
But Xi, it seems, is keen to avoid the mistakes predecessor Hu Jintao made after the globe’s last financial reckoning in 2008.
Then, as the so-called “Lehman Shock” bit and Wall Street plunged, governments everywhere looked down and realized their economies had been running on air – or fumes, in some cases.
Then-president Hu wowed the globe by immediately turning his stimulus switch on “high.” His government started with a 4 trillion yuan, or US$613 billion, stimulus extravaganza and never looked back. By 2009, as the subprime crisis slammed growth everywhere, China was growing 8.7%.
The stimulus binge saw 20 metropolises around the nation racing to build six-lane highways, hyper-modern airports, international hotels, conference facilities and white-elephant municipal halls and shopping centers.
This came at great cost to Beijing’s fiscal and credit trajectories. The growth in the $10 trillion-plus shadow banking system had Moody’s Investors Service, S&P Global Ratings and others increasing their mainland-focused teams.
The overhang of all that debt – and unproductive growth that quickly lost potency – left China all too vulnerable to shocks like Covid-19.
These lessons are guiding Xi’s 2021, as Beijing embraces the idea that China doesn’t need to grow 8% to succeed.
Steady as she goes
“Economists inside and outside China have long been critical of GDP growth targets for creating unnecessary waste and distortions,” says Andrew Batson at Gavekal Research. “A political imperative to reach an arbitrary level of growth, the argument goes, pushes government officials into backing debt-financed stimulus projects to ensure they meet their number. That argument seems to have gotten more traction in recent years.”
Ostensibly, Xi started stepping away from hard gross domestic product (GDP) targets. Growth, of course, is still plenty important. In fact, heady GDP will be the first priority in the Communist Party’s latest five-year plan. And getting China’s per-capita GDP to parity with “moderately developed countries” by 2035 will require lots of output.
Yet 2021 may be the moment when China formally shifts from prioritizing GDP quantity over GDP quality.
“By not setting a specific and quantitative growth target, we will be more proactive, active and at ease in coping with all sorts of risks, which is conducive to boost the flexibility of our development,” said Hu Zucai, vice director of the National Development and Reform Commission.
Again, not exactly the 2021 zeitgeist Trump had in mind for China. But as Republicans do an autopsy of why President Joe Biden beat Trump, the failure of Trump’s tariffs on goods and banning of mainland tech champions loomed large. The trade war did more to raise goods prices for American consumers than wrestle economic power back from the East.
At the same time, the Federal Reserve’s epic easing between 2017 and 2020, long before Covid-19 arrived, pushed Wall Street stocks into bubble territory.
Just as the People’s Bank of China’s policies fueled a bubble in Shanghai that burst in 2015, the Fed’s largesse had US shares surging faster than coronavirus infection rates – dangerously so.
But Xi’s government managed to keep its eye on the big prize even amid 2020’s turmoil: deleveraging. Whereas the Fed opened the liquidity floodgates wider and wider, the PBOC largely held its fire. And while Xi’s government surely ginned up fresh stimulus, it was modest relative to US rescue moves.
“From a banking and insurance industry perspective, the first step is to reduce the high leverage within the financial system,” Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission and party secretary of the central bank, said last week.
He called speculation in property “very dangerous” and warned bubbles in US and Europe may soon burst.
The bigger question, of course, is how China’s restraint is playing out globally.
Imports, exports, growth
Xi’s economy doesn’t seem interested in carrying the globe in 2021 the way it did in 2008/2009.
Case in point? Imports rose 2.7 times less than exports. The 22% annualized import jump in the first two months of the year is grand. It suggests, though, that China’s rebound is benefiting China far more than the rest of Asia.
There are some caveats. On the one hand, many Chinese exports source components from Asian neighbors, particularly those producing high-tech goods. Beijing’s latest import figures, it’s worth noting, display a divergence between heavy industries and high-tech ones. That the latter is outperforming is good news for a number of economies.
“In general, regional exports have been enjoying a strong run since the fourth quarter of 2020,” says economist Prakash Sakpal at Dutch bank ING. “By product type, electronics and automobiles are leading the strong growth trend, more so amid the ongoing shortage of semiconductor chips for the automobile sector, which is pressuring these exports higher.”
The clear beneficiaries, he said, are “Asia’s electronics heavyweights – China, Taiwan, Korea, Singapore and Malaysia.”
At the same time, China’s transition toward domestic demand-led consumption will pay bigger dividends around Asia over time. As Asia’s biggest trading power pivots away from boom-bust cycles, the region can look ahead to smoother sailing in the years ahead.
In this way, Beijing’s “unambitious” growth plan for 2021, says analyst Michael Hirson of Eurasia Group, “is meant to allow officials to strike a balance between growth and other priorities, including financial risks, innovation, and more balanced development.”
That means semiconductors over smokestacks.
As Premier Li Keqiang puts it, Beijing will “work faster to enhance our strategic scientific and technological capability” and will “regard scientific and technological self-reliance as a strategic support for national development.”
Industry Minister Xiao Yaqing, meantime, says Team Xi is focusing more on developing “independent and controllable” supply chains than GDP zigs and zags.
Beijing, of course, is being careful not to withdraw stimulus prematurely. Hirson notes that the fiscal deficit target is somewhat higher than expected at 3.2% of GDP, in keeping with an emphasis on policies to shore up consumption.
“Beijing’s geopolitical agenda,” he says, “remains a mix: pursuing high global ambitions to extend influence through trade, investment and public health while maintaining a hard line on sovereignty issues such as Hong Kong and Taiwan.”
Sustainability to the fore
Still, in the economic arena, Xi’s China may end up giving selfishness a good name.
Trump argued, hyperbolically, that China was “stealing” jobs from the US. Few, however, can argue that China hasn’t bent the World Trade Organization system to its own benefits.
Some might further argue that China is being self-centered by not shooting for 8% in 2021. That global leadership should matter more than Xi’s determination to deleverage the economy, this school of thought could insist.
Perhaps. But if China emerges from Covid-19 a developed and stable economy that generates more economic energy than it hoards, the ends may justify the means.