AMU Intelligence Original

China’s Economy and Its Effect on International Affairs

After the COVID-19 pandemic, many experts expected to see China’s economy bounce back quickly as China’s zero-COVID policies were relaxed and Chinese factories worked to fill international orders. However, the numbers coming from China show that its economic rebound has not been so impressive, according to The Economist.

China’s economy might have reached a point where the exceptional growth it has enjoyed year to year in the past few decades is no longer viable. From now on, China’s economy will grow at a more modest rate, similar to that of other developed economies.

Related: US-China Relations and Janet Yellen’s Trip to Beijing

Making Sense of China’s Economy

This year, Tao Wang, the chief China Economist at UBS Investment Bank in Hong Kong and a former economist at the International Monetary Fund (IMF), published a noteworthy book, “Making Sense of China’s Economy.” This book offers important insights into the complex structure of the Chinese economy that navigates between a strong centralized government, aging population and high debt levels.

Wang explains in her book that some key changes are expected as China’s population rate reaches its peak. Similarly, the urbanization process in China has reached its zenith and China’s aging population limits the need for new construction.

She also states how the overall debt-to-GDP ratio is about 300% and rising in China. This number is the highest among emerging markets and more importantly, it is higher than most advanced economies.

Wang notes that most of China’s debt is domestic debt, not foreign. But China has a much easier time when it comes to liquidity to pay off debt.

Wang observed in a recent interview with NPR that “a debt crisis is typically a liquidity crisis, and in the case of China, high domestic saving kept by capital controls at domestic banks means that more than 95% of China’s debt is domestic debt, financed by relatively stable domestic deposits and not subject to sentiment change of international investors.

“State ownership of the banks and the government’s guarantees on deposits and track record also make bank runs highly unlikely. State ownership also means the government can prevent banks from withdrawing credit or otherwise causing a credit crunch. Meanwhile, the government can also inject capital or liquidity to support the operation of the banking system, and can coordinate relatively orderly debt restructuring, as opposed to market-enforced deleveraging, which can be messy and overshoot.”

Wang also noted that while there was a rise in production after COVID-19 restrictions were eased in China, China’s economy continued to struggle. Wang observed, “going into the second quarter, property recovery faltered, with [housing] sales and starts falling much further. In addition, as local governments faced financing challenges, they tightened fiscal spending, which also constrained growth. Against this backdrop, the industrial sector started to destock and consumption recovery slowed in the second quarter. As a result, overall economic growth slumped in the second quarter.”

Other experts are less optimistic as to the future of China’s economy. For example, David Roche, president and global strategist at Independent Strategy, told NBC, “The Chinese model is clearly washed up on the beach with a huge number of legacy holes in it, and it’s not going to take off again.”

Roche is looking at recent economic developments that included housing market problems in China and U.S. government intervention in the tech sector that is expected to impede the growth of companies such as ByteDance, the Chinese creator of TikTok. In the New Yorker magazine, John Cassidy described China’s economic situation as “the move from the economic miracle to the long slog.”

Related: Cuba Gains a Not-So-New Listening Post, Courtesy of China

What Effect Will the Economy of China Have on Its Foreign Affairs?

The new reality of China’s economy, now expected to grow at a more modest rate in the future, will have an effect on China’s foreign policy. One recent example is China’s involvement with a recent deal between Saudi Arabia and the United Arab Emirates (UAE).

According to Madhumita Murgia, Andrew Englan, Qianer Liu, Eleanor Olcott and Samer al-Atrush of The Financial Times, Saudi Arabia bought artificial intelligence computer chips from U.S.-based company Nvidia. According to these Financial Times journalists, “Saudi Arabia has bought at least 3,000 of Nvidia’s H100 chips — a $40,000 processor described by Nvidia chief Jensen Huang as ‘the world’s first computer [chip] designed for generative AI’ via the public research institution King Abdullah University of Science and Technology (KAUST).”

These Financial Times journalists also note that the experts who will use these computer chips and build an AI model for KAUST will be Chinese. They say, says, “Many Chinese nationals with AI expertise have chosen to work at KAUST because they have been prevented from studying and working in the U.S. after graduating from Chinese universities on the U.S. entity list.”

Clearly, China wants to take a larger part in evolving Western industries such as artificial intelligence that will not develop holistically in China without transplanting knowledgeable experts. But the U.S. is not interested in helping China, so China will have to gain access to more knowledge via cooperation with other countries such as Saudi Arabia that are willing to employ Chinese experts in the use of U.S. technology.

In a recent issue of Foreign Affairs, Adam S. Posen, the President of the Peterson Institute for International Economics, predicted that the Chinese economic dream is ending. That is an opportunity for Washington to reshape its relationship with China.

Posen says that the new reality of China’s economy is here to stay and that it will make Beijing more open to a cooperative relationship. He characterizes China’s economy as suffering from “long COVID” but sees benefit in the continued growth of the Chinese economy. While the continued economic growth of China is still debatable, it will likely affect U.S. foreign policy.

Ilan Fuchs

Dr. Ilan Fuchs is a scholar of international law and legal history. He holds a B.A. in Humanities and Social Science from The Open University of Israel and an M.A. in Jewish history from Bar-Ilan University. Ilan’s other degrees include an LL.B., an LL.M. and a Ph.D. in Law from Bar-Ilan University. He is the author of “Jewish Women’s Torah Study: Orthodox Education and Modernity,” and 18 articles in leading scholarly journals. At the University, Ilan teaches courses on international law while maintaining a law practice in several jurisdictions.

Comments are closed.