Opinion – Samuel Pessôa: China, consistent signs of slowdown

China represents an additional chapter of the Asian growth model. The association of a market economy with a lot of accumulation effort –long working hours, very high quality of public education and a lot of parsimony in consumption– generates economies that manage to transition from poverty to high income in a few decades.

Marx would call this model primitive accumulation. One or two generations pay an immense cost in restraint of consumption, effort of work and study, to bequeath to their grandchildren a first world country.

The Asian growth model manages to generate labor productivity levels of at most 80% of American productivity. From this level onwards, economies lose dynamism and start to grow at the same pace as the leading economy. Note that this performance is far from bad.

I always thought that China’s growth is long-winded and that the first signs of a loss of performance would occur much later. Today, China’s labor productivity is on the order of a third of that of America.

I also never believed that a credit crisis could hamper the Chinese trajectory. In a dictatorial government, policymakers have the tools and discretion to respond quickly to a credit crisis and prevent it from becoming systemic.

Thus, the only limiting factor for the continuity of Chinese growth would be that the process, from some point on, would show signs of falling productivity growth. Due to the high quality of the public education system, it always seemed to me that this moment would be in a few decades.

However, there are signs that China’s ability to grow has been reduced. As always, at times of possible regime change, it is very difficult to separate the conjuncture from structural dynamics.

An appreciable part of China’s slowdown is due to the Chinese government’s difficulty in creating a new strategy to live with Covid. In a way, hijacked by the enormous success it had in the most acute period of the epidemic, the government insists on a zero Covid policy. It is very difficult to recognize that the epidemic has become endemic.

Additionally, since September last year, in response to the regulatory tightening in September 2020, the real estate sector has represented a strong headwind for Chinese activity.

However, there seem to be signs that demand is not picking up. Consumer confidence indicators have been at their lowest since at least 2006. Since 2008, consumer confidence regarding future income gains has declined and, consequently, the desire to increase savings has grown.

All these facts lead to very low retail growth. It has been running at the same level as December 2019.

The monetary policy response, as a result of the lack of demand, has been quick. Interest rates are at historic lows. Around 1.4% nominal and just below -1% real.

So perhaps China is in the midst of an equilibrium with lack of aggregate demand and it will be necessary for economic policymakers to revise their mental models. Welfare state benefits, particularly retirement, need to be far less greedy.

This step the Japanese economy has not yet been able to take. It seems that China is going down the same path, prematurely compared to Japan.