News this week that China has officially fallen into deflation, with consumer prices dropping 0.3 per cent year on year in July, adds a particularly unwelcome ingredient into the mix. Deflation is feared because declining prices persuade people to defer purchases, cooling the consumer vigour that Beijing has been trusting to propel a recovery from the pandemic.
The relevance of the issue reaches far beyond the country itself. Not only is China predicted to contribute 35 per cent of global growth this year - far more than any other economy - it also acts as a locomotive for the whole Asia-Pacific region, which is forecast to add 67 per cent of the world’s GDP expansion, according to the IMF.
Chinese policymakers have begun to talk about economic stimulus, with a meeting of the politburo in July calling for “stepping up countercyclical measures” aimed partly at energising consumer spending. But this focus misses a crucial reality.
As the revival in Soviet-style jokes hints at, China’s malaise is only partly economic. The deep context behind several of the impediments to growth is a strange hybrid of psychological and political factors - a sort of psycho-political funk.
The concerns of Wang Ning (not his real name), who works for a technology consultancy in Beijing, help demonstrate the way in which worries over China’s political direction are crimping people’s desire to spend.
Even though he earns an above-average salary of Rmb35,000 a month, Wang has begun imposing spending quotas on himself, arranged by specific categories. Dining out, for instance, is limited to Rmb1,000 a week, while spending on clothes and other items is similarly subject to fiscal discipline.
The reasons for his austerity are a mix of big-picture geopolitics and job market insecurity. Like many big city dwellers these days, his long-held belief in a better tomorrow has been undermined by what he sees as Beijing’s preoccupation with national security at the expense of generating GDP growth.
“I save as much as I can to prepare for black swan events like an invasion of Taiwan or a collapse in real estate markets,” Wang says.
Speculation over whether and when China might seek to attack Taiwan - which it regards as its own territory - has become a feature of private conversations in large cities, with 2027 often cited as a likely date.
The other aspect of Wang’s anxiety involves his job. Many of his friends who work in the property sector, private equity funds and investment banks have either lost their jobs or had to take pay cuts because of a mix of economic trends and regulatory clampdowns in these sectors.
There is ample reason for Wang’s psychology. Under Xi Jinping, China’s leader, a concept of “comprehensive national security” has come to dominate almost every aspect of life. The economy, culture, society, technology, ecology and others are officially classified as matters of national security deemed essential to the party-state’s survival.
“Certainly, Xi knows how important the economy is but he doesn’t know how to rescue it,” says Junhua Zhang of the European Institute for Asian Studies, a think-tank. “In reality, he is far from a modern leader.”
He recommends a return to the free market reforms of Deng Xiaoping, the architect of China’s economic opening-up from the late 1970s on. But more immediately, Beijing needs to step in with stimulus to arrest the deflationary spiral, analysts say. Without it, China’s psycho-political malaise may deepen.
Written by James Kynge, © Financial Times
