“Winter is coming.” That was the New Year’s message chief executive Robin Li delivered to the 42,000 employees of his search-engine company, Baidu, in a melodramatic letter to staff Wednesday. With “the song of ice and fire" looming in 2019, China’s “economic rebalancing,” he wrote, “is as forceful and real as winter for any enterprise.”
He wasn’t talking about the game of thrones between Beijing and Washington. Nor, primarily, was Apple CEO Tim Cook when he sent markets reeling the same day by slashing 2019 sales projections for iPhones, tablets and computers, a drop he attributed to a loss of Chinese consumer confidence. “Over 100 per cent of our year-over-year worldwide revenue decline occurred in Greater China,” he wrote, where “the magnitude of the economic deceleration” had taken the California company by surprise.
At first, these corporate dramas might look like effects of international tensions. After all, 2019 began with China at odds with much of the world. U.S. President Donald Trump continued to hammer away at his very personal trade war. Canada was trapped in a de facto hostage crisis with Beijing over its response to a U.S. extradition warrant against a Chinese executive. If that weren’t enough, Taiwan received a direct order to reunite with communist China Wednesday from President Xi Jinping, who added ominously: “We make no promise to give up the use of military force.”
Those clashes have played no small part in the current worldwide collapse in market capitalization and economic growth. But it would be overly optimistic to think that international disputes were the cause of the global slowdown; it would be a simple matter of resolving them – and, with the possible exception of Taiwan, the current clashes with China are temporary phenomena, unlikely to last beyond one aberrant presidential term.
As both CEOs hinted in their warning letters, the problem with China is not being triggered from outside; there’s a lot of evidence that the larger problem is coming from within China.
When we hear that China is pulling the world economy on a downward trajectory, we tend to think of its exports. For the past two decades, that’s all China was to the world: During the decade of globalization, from 1998 to 2008, the world economy ticked along to the value of the yuan, the trillions of dollars in China’s trade surplus and the shiploads of running shoes and touchscreens pouring out of Guangzhou and Shenzhen.
The past five years were supposed to change all that. China had found itself caught in a “middle-income trap” – too prosperous to remain a low-cost export manufacturer, but lacking the consumer-centred economy it needed to become a self-sustaining middle-class country. Mr. Xi exhorted the country to turn inward, to become a higher-wage consumer economy fuelled by domestic real-estate and stock markets. In 2015, Premier Li Keqiang announced his “Made in China 2025” policy, aimed at giving domestic production a 70-per-cent share of all goods within a decade.
Long before Mr. Trump began to threaten the transpacific goods trade, it was apparent that this “national rebalancing” was getting wobbly. Chinese consumers – except for the prosperous few in the top 1 per cent – just weren’t spending. Sales of key commodities such as instant noodles and beer (except expensive brands) have actually declined over the past couple of years, and domestic consumption has remained stuck at little more than a third of the economy, a share that actually dropped in 2017. (By way of comparison, Canada’s domestic consumption sits at 60 per cent.)
Home sales in many cities went flat as overbuilding drove prices down, infuriating buyers. And consumers have stubbornly been saving and investing rather than spending – in large part, presumably, because they sensibly want to hedge against the uncertain future under Mr. Xi, but also because China’s social safety net and health-insurance systems remain very flimsy. Yet their household-debt levels have also soared as middle-class incomes have not kept pace with prices.
In the past couple of months, these trends have become more acute. In December, China’s manufacturing sector saw its first decline in almost two years, and analysts attributed it as much to weakening domestic demand as to a Trump-hit export sector.
China’s leaders have responded the only ways they know how: by exhorting regions and cities to pump up consumer demand, by removing barriers to home ownership, by dumping stimulus funds into the economy – and by making aggressive gestures across the Pacific and the Taiwan Strait.
The larger threat to the world economy is not global tensions but the force of a billion people frustrated with a regime that hasn’t given them the lives they expected. We shouldn’t be dragged into an international conflict merely to mask that reality.