Beijing wishes to enter a new economic phase, even if it implies a temporary slowdown of the economy.
Another week of negative economic data from China confirms global economists’ worst nightmares. This time, faltering GDP data puts the final nail in a quivering coffin.
China, the world’s second-largest economy, has grown immensely and extremely fast in the last two decades. From a $1,2 trillion GDP in 2000, China’s economy now stands at $17 trillion, just behind the United States.
Many believed China could never stop growing or would have done so after passing the United States as the world’s largest economy. This belief was driven by China’s enormous population and manufacturing sector.
But dreams of a "Chinese century" have been shattered by the Covid pandemic. China’s President Xi Jinping has implemented harsh restrictions on the country, keeping them for far longer than any other developed nation. The last "zero-Covid" measure was removed only in December 2022.
Economists expected to see post-pandemic growth similar to that of Western nations, but their expectations have constantly been missed.
On Monday, China’s GDP data came out. In the second quarter, the dragon’s economy increased by 6.3%, far below the 7.3% Reuters forecast. Retail sales dropped to 3.1% in June and youth unemployment keeps surging, reaching 21%.
However, the reason for China’s economic sluggish performance might be caused by other factors as well.
China’s new isolationist policy
Crucially, the new economic data showed a further dip in China’s current account. This figure measures the difference between a country’s exports and imports. China, a manufacturing giant, has had a constantly positive current account for over fifty years.
But China, as we said now the world’s second-largest economy, is switching to a service-based economy, abandoning the manufacturing sector. Indeed, this is one of the reasons behind the country’s high youth unemployment.
In June, China’s exports dropped 8.3% year-on-year, while imports only fell 2.6%. China is importing more than it’s exporting, signaling an end to its "world’s factory" era.
It is clear that Beijing wants to pursue an isolationist policy, focusing on internal demand. This decision has definitely been affected by the United States’ trade war as well. Washington is hampering China’s technology sector, and recently Beijing replied by restricting exports of gallium and germanium.
The war in Ukraine was likely what tipped the balance of the Communist Party in favor of an isolationist attitude. With the seizure of Russian oil exports to Ukraine, China can now use Russia as a "petro-vassal", purchasing oil and gas from Moscow at a bargain.
Russian oil and gas will continue to fuel China’s economy, with less dependency on Western imports.
2023 will be remembered as the start of a new phase for China.
