China Misleads on Economy – USA Gov Policy

It is relatively easy to make up numbers to corroborate a tall story one wants to portray as real. Everyone has heard the fish tale where a dad caught a 30-pound brown trout on opening day of fishing season… that is the true story as told to others. Today China is attempting to convince the world that its economic expansion looks like that 30-pound trout. Could it be true? Seumas Petrie, after all, did catch the world’s heaviest brown trout in New Zealand in 2020, and it did weigh in officially at 44 pounds. The trick to creating a believable economic narrative is to make it close enough to reality to be believed possible. China recently tried and failed in its latest claims that the country’s economy grew 5.2% last year. It was a whopper of imagination on the part of the government in Beijing.

The lifting of pandemic restrictions did help bolster China’s Covid-era economy, increased domestic flights, and helped the revenue growth of consumer-focused companies expand, according to data outside of China’s National Bureau of Statistic, says Tom Hancock of Bloomberg. China also experienced a sharp drop in real estate construction, failing exports, and financially-strained local governments suffered. Rhodium Group, a leading independent economic data analytics firm, says the real economic growth number for China in 2023 is closer to 1.5%.

It will take time and good policy to fully recover. “China may see a cyclical recovery to perhaps 3.0-3.5% growth in 2024 as property bottoms out, although structural slowdown will naturally remain the dominant story for years to come,” according to Daniel Rosen, Logan Wright, Charlie Vest, and Ragan Quinn of Rhodium. Who’s correct? An analysis of the property sector in China indicates it is far from bottoming out in 2024. The OECD, World Bank and IMF predicted in 2022 China would meet its target. Rodium was more accurate when it argued that Chinese growth for 2023 would remain below 3%.

Analysts studying the Chinese economy point out that if China’s 2023 growth numbers were correct, consumers would need to have spent as “heroic levels.” That didn’t occur by mid-2023. Government spending remained mired in local debt burdens, there was anemic income growth with high unemployment, and declining household debt-to-income ratios. Construction slowed to levels that made high household spending impossible. The shrinking property sector and defaults among private developers, according to Rodium analysts, left local government without the needed revenue stream to meet obligations. China’s trade surplus shrank.

“By October, officials were alarmed enough to authorize one trillion yuan in special treasury bonds to boost local government investment, though most of that would not land until 2024,” says a Rodium analyst. During the turmoil China’s official statistics barely moved away from its predicted target numbers. Instead, officials “tweaked” data to reinforce a whopper of a fish tale until the economic numbers looked like what China wanted to present to the world. Now the world is asked by Beijing to believe predictions for 2024 when there is significant evidence of a manipulated 2023 baseline. The contraction of the property sector alone highlights some of the major problems Beijing is facing going into 2024. In the past it accounted for up to 25% of all economic activity in China. If reporting from China’s National Bureau of Statistics can be relied upon, then year-over-year from 2022 the country experienced a drop equivalent to 1.6% of China’s GDP. It may have been worse. To reverse that negative number other sectors of the domestic economy would have to have experienced tall, fish tale-sized growth. That didn’t occur as even officially, China’s private sector growth was negative.

“China saw net disinvestment in the foreign direct investment channel in the third quarter of 2023 for the first time on record (since the 1990s), reflecting firms moving more capital out of China than bringing new money in,” according to a Rodium report. For the first time in four years, net exports declined while net imports increased, further challenging the accuracy of China’s official numbers.

The official narrative remains, despite evidence to the contrary. What we can determine about China’s fish tale level of growth is that the country experienced a structural slowdown in 2023 that led to weaker than expected growth and it will take years to fully recover. In 2024 China faces trade policy activism in the West with potential countervailing duties intended to neutralize Chinese EV exports as well as European investigations into its alleged dumping of biofuels onto the EU market. Western analysts say these factors and a myriad of others support predictions for Chinese economic growth in the range of 3.0% to 3.5%. The bright spot may be that if Xi Jinping and the CCP continue to face a slowing economy, it may force the leadership to abandon extreme ideological control over the marketplace and consider embracing economic reform and a reopening to the West.

Daria Novak served in the U.S. State Dept.

Illustration: Pixabay

Quick Analysis

Ukraine’s Frozen Conflict

As we approach winter in the northern hemisphere, the war in Ukraine is beginning to resemble a “frozen conflict” from many perspectives. Ukrainian President Volodymyr Zelensky recently told the media he hopes the war will end faster once President-elect Trump takes over in January. Opinions in Moscow, however, differ from that of the Ukrainian leader. Russian President Vladimir Putin argues that the North Atlantic Treaty Organization (NATO) needs to exclude Ukraine from joining in “exchange” for peace. If it does not, he says, then no end to the war is in sight. So far there is no Christmas solution. Several NATO countries, according to Vladimir Socor of the Jamestown Foundation, are tentatively considering “coalitions-of-the-willing” to provide security for Ukraine outside of the formal NATO framework. There is, however, no collective mechanism today under which such an arrangement is viable. According to the NATO Charter, while Ukraine is a NATO partner country, it may not join as a full member since it has not fulfilled the requirements for membership. That has not stopped NATO and allies from continuing “to provide Ukraine with unprecedented levels of support, helping to uphold its fundamental right to self-defence,” according to the organization. Socor says that keeping Ukraine out of NATO will not advance peace with Russia. Waiting for a peace settlement, he suggests, would only serve to encourage Moscow to continue the war indefinitely. Although the Biden Administration officially withdrew its support for Ukrainian membership in 2021, NATO maintains an “open door” policy toward membership-seeking countries. The current White House position led the way for European states to oppose Ukraine’s membership saying that a decision should be delayed until “conditions are met.” Biden pushed for changing “open door” to a “bridge” metaphor. It is not intended as an across-the-board NATO policy and has been implemented in the past on a case-by-case basis, says Socor. “The alliance’s open-door policy was not fully insulated from Russia’s non-statutory blocking power, and NATO-aspirant countries’ path toward membership was not always irreversible.” Russia has successfully blocked states like Georgia from joining, first in 2008 and again after the war in Ukraine began in 2014. Russia recognizes the value add of Ukraine to NATO is enormous and that Kyiv has a better case than some other nations. Putin’s invasion was, in part, intended to foreclose that option. By 2021, Moscow was pushing hard to maximize its war objectives, which included further annexations of Ukrainian territory. A main goal for Putin was, and is, to ensure there is no Ukraine left to join NATO. As President-elect Trump prepares to assume office in January, he is faced with the historical challenges presented by the war. Post-conflict security guarantees were the center of several proposals made during the 2023 military stalemate. The incoming Trump Administration has yet to outline how it intends to handle the Russia-Ukraine war. Analysts in Washington believe that the new Administration will expect its European allies to guarantee the majority of Ukraine’s security needs. As we approach 2025, several European nations have acknowledged that they do not view Ukraine as eligible for NATO membership as it would draw the organization into the middle of the conflict. Others want to wait until the war is over or pending a “peace” settlement before considering Ukrainian membership. Socor reports that some “influential voices” are suggesting that “Kyiv should join NATO after “freezing” the war along a stable armistice line, de facto accepting Ukraine’s partition, with NATO security guarantees applying de jure to the government-controlled territory only.” This would mean starting accession talks soon with the actual talks to commence only after a ceasefire is in place. Trump arrives in Washington at a time when Putin’s hybrid strategies of war in Ukraine have eviscerated commonly-held differences between war and peace. “Absent a political consensus in NATO over Ukrainian membership, certain European allies, including France’s President Emmanuel Macron, are holding informal consultations about post-conflict security guarantees to Kyiv by NATO members outside of NATO’s framework,” according to the Jamestown Foundation. The Biden Administration downplayed the discussions on possible forms of military assistance and defense industry cooperation by sending only an Assistant Secretary of State. For a European peace to hold the Trump Administration would need to formally extend the United States’ nuclear deterrence to Ukraine. Options under discussion in Europe include a “coalition of the resolute” to deploy forces to Ukraine as part of a possible armistice package, deterring further Russian attacks, says Secor. European officials are also debating, without any agreement, whether its military forces could perform non-combat logistical roles to free Ukrainian forces to fight. None of the possible courses of action has moved forward as all eyes are waiting on the incoming Trump Administration for clues about its intended level of support for a NATO framework and other non-NATO proposals. Daria Novak served in the U.S. State Dept.