Road to nowhere: China's economic rebound is built on straw
China's V-shaped rebound must be taken with heaps of salt. The country has reclaimed all lost output since the pandemic, but only by doubling down on an exhausted model of market-Leninism that leads nowhere.
Retail sales fell 11 per cent in the first half and have yet to recover fully. The service sector is still depressed. The 3.2 per cent rise in GDP from a year ago has been flattered by a massive surge in metal-bashing for infrastructure projects of diminishing value, or no value at all.
It has gone into cement-mixing for a real-estate market with over 60 million empty flats. Little of this "economic activity" is responding to any meaningful market signal, and it amounts to ecological vandalism.
The funds are being channelled through the 150,000 chronically-inefficient state enterprises (SOEs), which serve chiefly as a machine of patronage and control for Xi Jinping's Communist Party. The more dynamic private sector saw a 7.3 per cent fall in investment over the first half.
"Beneath the perfect V-shape lies an uneven recovery. And there doesn't seem to be much of a catalyst for a faster catch-up by the lagging sectors from here on," said Wei Yao from Societe Generale.
The scale of stimulus matches the vast package launched during the Lehman crisis and has lifted the augmented fiscal deficit to 15 per cent of GDP. But the 2008-2009 credit blitz is a bad precedent.
It pushed the Chinese economy into a debt-trap, a concept used by the Bank for International Settlements to describe a slippery slope where further debt is constantly needed to overcome the effects of the previous debt.
This short-circuits the Schumpeterian cleansing of creative destruction and ends in stagnation. The West has been doing this too, but China is the arch-champion. The post-Lehman stimulus is deemed a mistake in hindsight by sophisticated economists in China and by most external observers.
The World Bank says total factor productivity - the measure of authentic economic gain - collapsed from an average rate of 2.8 per cent in the early 2000s to 0.7 per cent over the following decade. China has acquired an "old" economy profile before it is rich. The contrast with the past take-off trajectories of Japan, Korea, or Taiwan is striking.
Economic plenipotentiary Liu He vowed four years ago to break out of this trap with a blast of supply-side reform. Declaring war on the "fantasy" of perpetual stimulus, he described leverage as the "original sin" of China's undoing. "Trees cannot grow to the sky," he said.
Liu He warned that if the country did not bite the bullet, the costs would be "much higher" in the future. "China's economic performance will not be U-shaped and definitely not V-shaped. It will be L-shaped," he said. The pandemic stimulus package is everything that Liu has been fighting against. It is a full-blown policy capitulation. While the infrastructure spending has prevented a surge in unemployment - the Politburo's chief worry - it entrenches the most destructive forces in the Chinese industrial system.
It is also a Faustian Pact that may have closed off China's final chance to avert Soviet-style decline. We forget now that the Soviet Union also had large pockets of excellence in its heyday, but it is breadth and balance that counts for a superpower. China's return to its worst industrial habits is an environmental disaster. Global Energy Monitor says China is developing 250 gigawatts (GW) of new coal-fired plants, twice the entire existing coal power capacity of the EU. It has proposed another 41 GW so far this year already and has relaxed its "traffic light" system for limiting permits.
The excuse is that the latest ultra-supercritical plants will displace dirtier plants but this technology curbs local air pollution much more than CO2 emissions. It is hard to avoid the conclusion that China is thumbing its nose at the world and is giving up any serious effort to wean the economy off coal, still generating two-thirds of the country's power.
This is going to be a big bone of contention as green ideology becomes the new belief-system and mobilising political doctrine of the West. Europe is pressing ahead with its green deal; the US will move in the same direction if there is a Democratic sweep in November. China will then be looking straight down the barrel of a coordinated EU-US carbon border adjustment tax.
One reason China clings to coal is that its grand plan for 400 nuclear plants has run aground. Japan's Fukushima meltdown led to a Chinese moratorium on new reactors. This has since been lifted but safety standards are tougher and that has changed the cost structure.
The reality is that large nuclear plants are no longer viable without exorbitant subsidies, disguised or otherwise. Plans by China's CGN to build a reactor in Essex do not make any commercial sense unless British consumers are fleeced to pay for it. Offshore wind farms will be generating power at less than half of nuclear cost by the mid-2020s, and they will come on stream rapidly, with negligible safety risk.
The Chinese company is blacklisted by Washington for alleged attempts to acquire US technology for military purposes but in a sense that is irrelevant. The UK's nuclear expansion plans are a commercial absurdity and continue only out of bureaucratic inertia. Tory hardliners should hold their fire against CGN. The campaign to drive it out of the UK infrastructure's system along with Huawei is unnecessary and is starting to feel like an anti-Chinese witch hunt.
All the Government needs to do is to announce that there will be no more special cross-subsidies for nuclear power after Hinkley, and that all new reactors will have to compete on the same footing as future wind - that is to say, producing power at or below market prices, with no drain on the Exchequer. The CGN problem will solve itself.