China at large maneuvers amid threats and new growth prospects

Growth is slowing down sharply in the last quarter mainly due to factors related to Covid. This will not fail to penalize the global economy although in 2021 the Chinese economy is expected to grow 8% (the highest rate since 2011)

• Beyond the contingencies, there are indications from China of a mutation underway which, in the long term, could give a new impetus to growth, also improving its quality

• Some strategic sectors of the economy (internet services, healthcare and education) have been drastically reformed. Measures have also been taken to reduce social inequalities and revive demographics, sometimes with effects that have alarmed Western investors

Several reasons lead us to direct our gaze to China. After the record levels of the first quarter of 2021 (18.3%), growth is slowing down considerably (4.8% is expected in the fourth). Reasons: the spread of the Delta variant, the floods in the province of Henan (300 dead and over a million evacuated) and a simultaneous shutdown of production in various plants for scheduled maintenance but also the impact of new sectoral laws and regulations. The high correlation of the economic trend with equities caused an immediate slowdown in the Chinese stock market. And there will be no lack of effects on the global economy which, as a general rule, pays for the slowdowns of the Chinese economy with less growth in the order of a third of what is recorded in the East.

Let's see in detail what is happening and what can be expected in perspective. Let's start with a contingent aspect, Covid. Compared to the past, the diffusion of the Delta variant is more extensive and affects economically sensitive areas (from the territory of Nanjing to twelve neighboring provinces). In mid-August, part of the port of Ningbo, the third largest in the world by traffic, was closed, in line with the rigidity of the Chinese authorities, which drastically intervene at the slightest alarm. The first thought generated by this decision obviously goes to the consequences on global supply chains already under pressure. For some months, the situation has been difficult due to the bottleneck effect created by the exponential increase in demand for intermediate goods connected to the recovery and the difficulty of finding alternatives due to technological compatibility. Furthermore, the precautions imposed by Covid structurally slow down the movements and delivery times that, even before the partial closure of the port of Ningbo, had reached levels never seen before in terms of intensity and duration for Chinese goods.

The Chinese approach to Covid, much more radical than that of Western countries, however, seems to work. Additionally, the Chinese central bank immediately decided on a new monetary stimulus and is expected to add one dedicated to small and medium-sized enterprises, confirming a reassuring reactivity. This brings the growth forecast for 2021 to 8% (the highest since 2011), below the forecasts at the beginning of the year (9%) but higher than the government's target (6%).

The policy of combating Covid could then weigh on the contingent prospects of the Chinese economy. The government is oriented towards pursuing group immunity, but the goal is far away. The vaccination plan is progressing slowly (55% of Chinese have been vaccinated) and the national vaccine used is less effective than Western vaccines (which were not approved). Result: the population perceives the Covid danger as still high, as shown by the data on territorial mobility (cars and trains, in particular) still below pre-Covid levels, contrary to what is recorded in Western countries, which have practically returned to normal levels.

If we look beyond the Covid emergency temporally, however, China offers indications of a mutation underway which, in the long term, could give a new impetus to growth by modifying its quality. Recent legislative and regulatory developments have drastically reformed some sectors of the economy (internet, healthcare and education, as mentioned in the previous newsletter) with the aim of reducing the social inequalities (now at the alert level) that accompanied the new course of the economy inaugurated forty years ago by Deng Xiaoping.

The new regulation of the technology sector also aims to overcome the current concentration of the sector which, de facto, has allowed three large private industrial conglomerates to gain strong control of population data, a situation incompatible with the directing policies of the Chinese government.

The Chinese authorities also intervened to halt the demographic decline caused by decades of one child policy. Initially amended in 2015, this policy was abolished last July. By the government's own admission, the law has been maintained for too long, generating dangerous aging of the population and numerous side effects, such as the high costs incurred by parents to ensure their child's academic success. The radical and immediate transformation of the tutoring sector (i.e. paid services for supplementary training to school education) in a non-profit sector reflects the attempt to counteract the effects of the mistake made. The inevitable collapse of the stock market value of companies operating in the sector was a cause for alarm for Western investors: the path of reforms undertaken by the Beijing government may not be painless.

Therefore, among the long-term priorities there is not only the reduction of inequalities but also a new demographic policy that encourages young couples to have more children since the increase in the workforce is crucial to ensure economic growth. The intervention on the demographic factor is part of a broader strategy to increase productivity which, considering the starting point of forty years ago, has never been a problem but now requires support tools.

In summary: when looking at global growth, the contingent slowdown of the Chinese economic cycle can no longer be considered a background noise, but the signal of the opening of a new phase. The long-term prospects are interesting, but it will be a question of how the path will be accomplished and whether it will be convincing for foreign investors.

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