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Supply Chains and the Chinese Economy

November 2, 2023


By any measure, China’s rise as an economic power has been impressive — some people have even called it miraculous. Wikipedia notes, “The Chinese economic reform or Chinese economic miracle, also known domestically as Reform and Opening-up, refers to a variety of economic reforms termed ‘socialism with Chinese characteristics’ and ‘socialist market economy’ in the People’s Republic of China (PRC) that began in the late 20th century. Guided by Deng Xiaoping, who is often credited as the ‘General Architect’.” The latest economic reports out of China has many experts wondering if the Chinese economic miracle is slowing or ending. The Economist reports, “[The latest economic figures out of China] showed that the economy grew by 6.3% in the second quarter [2023] compared with a year earlier. That looks impressive. But it was slower than expected. And the figure was flattered by a low base in 2022, when Shanghai and other cities were locked down. The economy grew by only 0.8% in the second quarter compared with the first three months of the year, an annualized rate of merely 3.2%.”[1]


What’s Going On?


According to The Economist, China’s explanation for its soft economy is unconvincing. The magazine explains, “China’s statisticians have blamed this weakness on changes in global commodity prices. … That is an unconvincing explanation for the weakness of China’s nominal growth, because GDP should count only the value added to a good in China itself, thus excluding the value of imported commodities. Perhaps deflationary pressures are spreading.” Adam S. Posen, President of the Peterson Institute for International Economics, agrees the problem goes deeper. He writes, “The seriousness of the problem is indicated by the decline of both China’s durable goods consumption and private-sector investment rates to a fraction of their earlier levels, and by the country’s surging household savings rate. Those trends reflect people’s long-term economic decisions in the aggregate, and they strongly suggest that in China, people and companies are increasingly fearful of losing access to their assets and are prioritizing short-term liquidity over investment.”[2]


Posen traces the origins of China’s weakening economy back to 2015, when the government began to tighten its control over the economy. He explains, “Chinese economic behavior … began shifting in 2015 when the state extended its control: since then, household savings as a share of GDP have risen by an enormous 50 percent and are staying at that high level. Private-sector consumption of durable goods is down by around a third versus early 2015, continuing to decline since [China’s post-Covid] reopening rather than reflecting pent-up demand.” If Deng Xiaoping’s efforts were viewed as Reform and Opening-up, Chinese President Xi Jinping’s efforts are seen as Reform and Tightening-up. Posen explains, “Since Deng Xiaoping began the ‘reform and opening’ of China’s economy in the late 1970s, the leadership of the Chinese Communist Party deliberately resisted the impulse to interfere in the private sector for far longer than most authoritarian regimes have. But under Xi, and especially since the pandemic began, the CCP has reverted toward the authoritarian mean.”


Economists Zongyuan Zoe Liu, a Fellow for International Political Economy at the Council on Foreign Relations, and Benn Steil, Director of International Economics at the Council on Foreign Relations, insist that Xi’s authoritarian style is unlikely to reverse China’s current economic trends. They explain, “A great leader needs a great policy, and in Xi’s China there is always a new one. In December 2022, the government announced [a] reassuring ‘consumption-led growth’ [policy] — the centerpiece policy of an ambitious new 12-year economic plan. For the first time in modern Chinese history, the country’s planners would prioritize ‘expanding household consumption’ over ‘effective investment’ as a long-term strategy. In practical terms, China’s growth would now be driven mainly by household spending decisions and not by the state directing or subsidizing companies to build and produce.”[3] They note, “Almost universally, economists have praised consumption-led growth. Indeed, if carried out properly, this policy shift would help China avoid the dreaded middle-income trap — a phenomenon in which declining productivity and falling investment returns in developing nations lead to stagnating living standards.”


Unfortunately, Liu and Steil don’t believe the policy will last. They write, “Sensible though it is, consumption-led growth in Xi’s China is doomed to fail. As Xi has done so often in the past, he will back away from the policy once the inevitable backlash from powerful constituencies, including state-owned enterprises, local governments, and the national security bureaucracy, takes hold. The Chinese people, knowing that the leader will bury the initiative at the first signs of worry from the party, will be reluctant to embrace it. Instead, they will hunker down, saving — in a country with the highest savings rate on earth — yet more of their meager earnings for the expected hard times ahead.” Economics writer Joe Tauke is even more blunt. He writes, “The Chinese century is over. Facing upside-down demographic and economic trends, China is heading off the cliff.”[4]


Impacts on the Supply Chain


One would think that pursuing a consumption-based economic strategy would be good for supply chain operations. However, the pandemic highlighted the danger of relying too heavily on China’s manufacturing sector. This realization, coupled with China’s more aggressive foreign policy and its growing domestic authoritarianism, prompted talk about America decoupling its economy from China’s. Fortunately, America and Europe seem to be pursuing a more sensible de-risk rather decouple strategy. With the level of internal consumption still a question mark in China, supply chain professionals will need to follow closely demand signals coming out of China.


As noted above, Chinese consumers have the world’s highest savings rate. Consumers can’t both save and spend. And Tauke reports, “A whopping 70 percent of Chinese household wealth is held in real estate.” As the population ages and dies, that wealth is likely to disappear. Tauke asks, “What will happen to property values in a country where between 50 and 70 percent of its people have disappeared? What will happen to tourism? To retail?” These are obviously long-term concerns. In the short-term, as the experts cited above remind us, policies in China change often and those policies can affect supply chain operations. To monitor these changes, Enterra Solutions® developed the Enterra Global Insights and Decision Superiority System™ (EGIDS™) to help clients make decisions during rapidly changing circumstances. Driven by Enterra’s artificial intelligence engine — the Enterra Autonomous Decision Science™ (ADS®) platform — EGIDS can help business leaders rapidly explore a multitude of options and scenarios. Changing buying patterns prompt changes in supply chain operations. All of this needs to be dynamically modeled and forecasted so manufacturers have the right product on the shelf at the right retailer (or online), at the right time for people to consume it.


Concluding Thoughts


Liu and Steil conclude, “A consumer-led economy requires a high degree of individual autonomy and commercial freedom to respond to citizens’ ever-changing wants — requirements that the CCP under Xi has been increasingly unwilling to accommodate. The policy of consumption-led growth may have been started with the sincerity that typically accompanies ignorance of collateral consequences.” Posen adds, “The more Beijing tries to stave off outflows of useful factors of economic production — for instance, by maintaining strict capital controls and limiting listings of companies in the United States — the more it will deepen the sense of insecurity driving those outflows in the first place. Other autocrats have tried this self-defeating strategy; many were forced to keep temporary capital controls in place indefinitely, only to drive people and companies to make more efforts to get around them. As seen repeatedly in Latin America and elsewhere, including during the final decline of the Soviet Union, such policies almost invariably spur more outflows of people and capital.” It’s way too soon to declare an end to the Chinese economic miracle; however, there are certainly signs of it slowing. Supply chain professionals need to monitor closely all of the changes taking place in that economically important country.


[1] Staff, “How much trouble is China’s economy in?” The Economist, 17 July 2023.
[2] Adam S. Posen, “The End of China’s Economic Miracle,” Foreign Affairs, 2 August 2023.
[3] Zongyuan Zoe Liu and Benn Steil, “Xi’s Plan for China’s Economy Is Doomed to Fail,” Foreign Affairs, 29 June 2023.
[4] Joe Tauke, “China’s Great Leap Backward: So much for the next dominant superpower,” Salon, 30 July 2023.

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