Xi Lays Bare China’s Economic Delusion

Has self-delusion peaked in China? Maybe so.

Chinese premier Xi Jingping says he wants economic growth in the communist country to outpace that of the U.S., according to a recent report from the Wall Street Journal. The story states the following:

• “Mr. Xi told senior economic and financial officials that ensuring that the economy is stable and growing is important because it is critical to show that China’s one-party system is a superior alternative to Western liberal democracy, and that the U.S. is declining both politically and economically.”

The problem is that China’s official economic statistics have long been aspirational rather than actual. Put another way, what the Chinese government reports about its economy each quarter, reflects the desire of the country’s top leadership rather than what is really happening.

So yes, no doubt China’s growth will exceed that of the U.S. this year because Xi has mandated that the data will show that.

However, what’s going on in the Chinese economy — and the global outlook — is going to make those forthcoming economic reports hard to swallow.

Shanghai Lockdown

For instance, Shanghai, one of China’s most important economic hubs, is locked down as the Chinese Communist Party tries to ensure zero Covid-19 infections. The citywide restrictions have been in place since late March.

As most of us know from our experience of the last two or so years, locked down cities don’t grow the economy. If anything they shrink it.

Remember when New York City was locked down during the pandemic? That was bad for the U.S. economy. The same will be true in China with Shanghai locked down.

Declining Steel Output Hard to Square with Fast Growth

There are other factors that show China is already in economic trouble. Most notably the country’s steel production was down substantially during the first quarter of the year, according to recent data from the World Steel Assn. Output in that industry fell to approximately a quarter of a billion (243 million) metric tons in the 3-months through March.

That’s a year-on-year drop of 10.5% from the world’s largest steel making nation. And it reflects serious weakness in the Chinese economy which has relied heavily on real estate construction and manufacturing, both of which require copious quantities of the metal. In short, it’s hard to reconcile the idea of a fast growing Chinese economy with a shrinking steel industry.

High Priced Rice Coming

It also looks like China is going to suffer some serious food price inflation for one of its key staples: Rice. Likely reduced supply and increased demand will make it far more expensive, experts say.

Expensive wheat, which has surged in price this year, will prompt buyers to switch to rice which is currently cheaper, according to a recent report from agricultural commodities expert Shawn Hackett . However, as the substitution takes place demand for rice will increase so pushing up prices.

On top of that the surging cost of plant food (a.k.a. fertilizer) and probable bad weather should reduce supplies. “Record demand against reduced production is a recipe for the cheapest grain market in the world to become overpriced,” the Hackett Money Flow Report states.

It’s worth remembering that rising prices tend to agitate people in authoritarian countries.The Chinese Tiananmen Square protests in 1989, which led to a massacre, were partly the result of high pork prices in that country. Likewise, the Arab Spring, which started in 2011 was sparked by soaring bread costs. Or put another way, don’t be surprised if China suffers some increased civil unrest this year.

None of this says China won’t report spectacular growth this year. It probably will. But that likely won’t reflect the true underlying state of the second largest economy.

Follow me on Twitter or LinkedIn. Check out my website or some of my other work here.