By George Lei, Bloomberg macro commentator and reporter.
Lower growth, higher inflation and less stimulus.
That’s the most-likely scenario over the coming months, and possibly years, if the ruling Communist Party presses on with its “common prosperity” drive to transform China’s economy. Things will get worse before they get better.
The phrase “common prosperity” may sound like political jargon to foreign ears. Yet Beijing’s latest moves bear resemblance to left-wing policies practiced elsewhere: higher wages for gig workers, lower profits for corporations and efforts to control home prices and rent, just to name a few.
Meituan, a Chinese equivalent of Doordash, has been ordered to guarantee minimum wages and pay for insurance for delivery workers. Internet giants including Alibaba and Tencent have coughed up billions in penalties and “donations” for social aid. Doesn’t that sound similar to the calls for “living wages” “tax big tech” and “spread the wealth” from American progressives?
Similar to the West, the fruits of China’s growth over the past couple of decades have disproportionately benefited those with good education, political connections or capital to invest. Beijing’s attempts, if successful, should dampen growth in both housing prices, considered a sure-fire bet for the well-off, and the real estate sector, which together with related industries contribute almost 30% of the economy. Meanwhile, labor income is certain to rise at a time when demographic trends are already creating skilled worker shortages and pushing up wages.
“The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival,” a book written by Charles Goodhart and Manoj Pradhan and referenced by Jerome Powell in his Jackson Hole speech last month, points to a future where China’s shrinking labor force, on top of a less globalized economic system, results in higher inflation and less inequality worldwide. China’s policy drive could accelerate such an eventuality.
The crackdown on real estate and tech, combined with efforts to raise working-class pay, will “support the development of a healthier and more balanced economy,” according to analysts led by Mark Haefele, chief investment officer at UBS Global Wealth Management. What they don’t mention, however, is that falling growth and rising prices could come first before the structural changes intended by policy makers run their course and the benefits kick in. Investors should be prepared to embrace more pain in the near future.
China will be reluctant to cut policy interest rates under a new “cross-cyclical” policy framework that prioritizes long-term goals such as reducing inequality, according to ANZ Banking Group. Monetary policy “will be focused on supporting structural reforms” and interest-rate cuts “are not preferred,” wrote Raymond Yeung, the bank’s chief economist for Greater China.
UBS remains optimistic on the prospects of China’s long-term consumption growth. The focus on “lifting disposable incomes … and supporting employment” is beneficial to the “general consumption upgrade,” favoring China’s consumer durables and services, according to the Swiss bank.
