One thing we have that China needs

 

Generally, the narrative surrounding the recovery of the Chinese economy from the coronavirus pandemic is positive.

China's official figures say that industrial production has bounced back strongly and the construction industry is positively booming.

But behind the big headline forecasting a swift global recovery, there lurks a very different reality which Chinese households and local governments are experiencing.

In the northeastern province of Heilongjiang, local government officials have been told to go on a cost-cutting spree in order to free up funds to direct towards the economic recovery or to fight the coronavirus pandemic.

Under the 90-point directive, government employees were instructed to cut spending on pens, paper, scissors and glue. They were also told they should not expect a bonus or pay rise and that colour printing was to be avoided.

Despite their relative success in fighting COVID-19, general government revenue is expected to fall for the first time in 20 years, putting significant pressure on local and provincial governments across China.

From 2000 to 2019 China’s general public revenue increased. But 2020 is a different story. Picture: Supplied
From 2000 to 2019 China’s general public revenue increased. But 2020 is a different story. Picture: Supplied

With provincial governments only receiving around 50 per cent of national revenue, but being responsible for 85 per cent of overall government expenditure, provincial governments face an uphill battle as the Chinese economy continues to recover.

But despite an overall attitude of relative thrift from Beijing and an escalation of the country's trade war with Australia, China is consuming our iron ore at a record pace, paying near top dollar prices.

Iron ore imports remain high in China as it builds its way out of economic hardship.
Iron ore imports remain high in China as it builds its way out of economic hardship.

This serves to illustrate the increasingly two-speed nature of the Chinese economy. While heavy industry and construction continue to boom, the story told by the wallets of Chinese consumers is quite a different tale.

Despite Beijing's best efforts, inflation-adjusted retail sales are still down year on year according to the latest data. This compares extremely unfavourably with the around 7 per cent year on year growth the official statistics were recording before coronavirus reared its ugly head.

For decades, China has been trying to slowly rebalance its economy away from real estate and infrastructure construction, towards a more traditional consumer and services driven model.

In his last major speech as General Secretary of the Communist Party, Hu Jintao (Xi Jinping's immediate predecessor) in 2012 called for economic reforms that would increase consumer spending, ultimately with the goal of reducing Beijing's dependence on export and fixed asset investment driven growth.

But in this time of crisis it appears Beijing has fallen back into old habits, of using infrastructure and real estate construction driven growth to fire up its faltering economy, in the same way it did back during the global financial crisis.

On balance this is good news for Australia, specifically iron ore exports.

Mount Whaleback iron ore mine in the Pilbara region of Western Australia. Iron ore is essential for China’s recovery. Picture: Getty
Mount Whaleback iron ore mine in the Pilbara region of Western Australia. Iron ore is essential for China’s recovery. Picture: Getty

Despite the rising tensions between Beijing and Canberra and the growing list of Aussie exports hit by Chinese trade actions, iron ore remains our one export China absolutely cannot do without.

In an ironic twist of fate, the more China's economy potentially struggles to fire amid a backdrop of global economic uncertainty, the more Aussie iron ore it needs to keep its go-to industry's booming to support its overall economic growth.

Even Chinese Premier Li Keqiang recently acknowledged that there were issues with China's ongoing economic recovery. During a meeting of the Chinese Communist Party State Council, Li conceded that consumer spending was the "weak link" in the economic recovery thus far. He went on to state that in order to increase consumer consumption, "we need to explore new methods".

China expert and Peking University finance professor Michael Pettis recently mused on Twitter that Li was right about China needing to explore new methods to drive consumer growth.

But he ultimately concluded: "For all its talk of "upgrading consumption", Beijing has no idea of how to deliver the income increases that are required."

 

Despite the overwhelming strength of Chinese industry and construction sectors, the less than stellar recovery being experienced by regular everyday consumers leaves the broader Chinese economy in a somewhat precarious position.

During the global financial crisis (GFC) the stimulus from Beijing was so large that China seemingly powered through the crisis relatively easily to the casual observer, but it came at a very heavy cost for Beijing.

Debt levels skyrocketed to new heights, giving rise to concerns that there were growing risks of systemic issues from the ever-increasing mountain of debt.

This is what has left China in the paradoxical situation it finds itself in. On one hand Beijing knows there are risks that come with another big cash splash and is attempting to be relatively thrifty where it can.

On the other, it knows that its consumers have not bounced back to their previous levels of strength yet and that its growth engine of infrastructure and real estate construction needs to be fuelled by further stimulus.

If the global economy bounces back strongly from the pandemic in the New Year as stimulus is increasingly tapered and withdrawn, Beijing may once again attempt to place its focus on rebalancing its economy towards a more consumer driven model.

But if the recovery of the world economy falters and Chinese industrial productions begins to suffer from weaker global demand, Beijing may increasingly look to its old tried and tested way out of a difficult crisis. More infrastructure and real estate construction - fuelled by Australian iron ore.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

Originally published as One thing we have that China needs



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