China’s economy has repeatedly disappointed expectations since the end of the Covid pandemic. Consumption is sluggish, the property crisis is a burden and attempts to achieve growth through exports are being met with punitive tariffs from the rest of the world.
Few Western observers know the world’s second-largest economy better than Joerg Wuttke. In an in-depth conversation with The Market NZZ, the long-serving former President of the EU Chamber of Commerce in Beijing talks about China's growth prospects, the problem of overcapacity in the country and explains who calls the shots when it comes to economic policy.--
Joerg Wuttke:
"The property crisis continues to be the biggest drag [for the Chinese economy]. It had been looming for a long time because it was obvious that property prices were significantly inflated."
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"There is also a special feature of China: everything the government announces with big plans ends up creating overcapacity at some point. The best current example is the automotive sector, where around 140 suppliers are fighting each other. This is eroding the profitability of companies and people are struggling to survive."
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"People [who consider buying property] have become cautious. For years, they thought they could buy a flat and sell it later at a higher price. And now they are suddenly realising that they have lost 30%. The government should do more to counter this, it is not doing a good enough job [...] There is no point in the government lowering mortgage rates if I don’t know whether the apartment I have bought will ever be completed or if I have to assume that prices will continue to fall. There are 90 million empty housing units in the country, which is a huge oversupply.
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"Consumption is also restrained when people see that their own family members are losing their jobs. There are many unemployed people in rural areas who have returned to their villages from the big construction sites. Pessimism, which has never really been an issue in the last thirty years, has spread in the last twelve months."
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"Nobody knows for sure [how high the unemployment is]. It is a question of definition, because in the official statistics you are apparently not considered unemployed if you work even one hour a week. Youth unemployment climbed to almost 30%, but then the government changed the statistics. However, you can see a clear trend if you look at the purchasing managers’ indices [...] Companies are holding back on hiring, especially in the private sector.
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"This is the first Third Plenum [which takes off on July 15] that has not triggered any great expectations. Which probably means that markets will hardly be disappointed if not much comes out of the session. We will certainly hear warm words, especially addressed towards foreign companies [...] they are likely to announce plans to reduce protectionism between [Chinese] provinces and open up the domestic market. A market struggling with overcapacity leads to provinces closing themselves off from each other."
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"China accounts for 30% of total global production, but it only accounts for 14% of global consumption. That is a huge imbalance. President Xi Jinping has focussed on the manufacturing sector because he hopes it will also boost innovation. But launching big plans in China always leads to everyone aiming for the goal, everyone seeing a lot of money, and then everyone doing the same thing in 31 provinces and regions. The country has more than 150,000 state-owned enterprises. They all remain on the market, even though many of them are losing money. [...] This [Chinese] economy has a gigantic skew. There needs to be consolidation, and that would require political courage."
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"Probably about ten [among the 140 actors in the automotive sector are profitable]. The top dog is BYD, Tesla is also doing very well, they both have capacity utilisation rates of almost 100%. However, a third of the suppliers have a capacity utilisation of less than 20%. These companies are making huge losses, but they are being concealed and absorbed by local governments."
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"This consolidation [consolidation of the Chinese economy] will be much more painful. It won’t be easy in a country that doesn’t have a well-developed social safety net."
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"Xi [who doesn’t have much sympathy for social security and doesn’t want a welfare state] once told the Danish prime minister that he could not understand these lazy Europeans. In China, people have to work hard. He seems like someone from another time. He tells unemployed young people that they should just go to the countryside and help the farmers. There's a huge generation gap in the country."
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"I think the tariffs [imposed by the EU on Chinese electric Vehicles] are rather low. BYD’s share price rose by 9% when they were announced. That really says it all. The tariffs are not designed in such a way that the Chinese can no longer sell cars in Europe. But this will be an issue worldwide: the US is imposing 100% import duties on EVs, Turkey has added 40%, Brazil is imposing tariffs in the steel sector. There will be more to come. We have to be prepared for the fact that this flood of exports from China will also trigger counter-pressure in the so-called Global South. The playing field for China is getting narrower and narrower.