Soapbox: Turning the supertanker

How do you turn a super-tanker? Starting early is a good idea.

Two super-tankers dominate the global economy – China and the US. If the economy of either catches cold, the rest of the world sneezes. The US is not yet out of the ‘recession woods’ while China looks to be in some difficulty. A combination of its shrinking and aging population, faltering external demand (as the world economy slows), and weakening domestic consumption tend to suggest China’s growth this year will be sluggish at best.

If we can credit the Chinese premier, Li Keqiang, China is going to try to make waves by changing the course of its super-tanker; the Chinese consumer is going to be prioritised. “Boosting consumption is a key step to expand domestic demand. We need to restore the structural role of consumption in the economy”, said Li at the weekend. This decision to make domestic consumption a key driving force of its economy could have global repercussions. Chinese consumers have not been big spenders by comparison with other nations. While consumer spending regularly accounts for around 70% of US gross domestic product (GDP), in China such spending made up just 38% of GDP in 2021.

This is not just a ‘China re-opens post-Covid’ story. If Li and his communist party associates are true to their word, China is about to embark on an entirely fresh route. Prices of key commodities – such as base metals, the essential ingredients for a host of consumer goods – have already climbed much higher on the re-opening of China’s economy. If consumerism is becoming the new CCP-led policy, price for basic commodities and finished products will rise even higher.

Yet the policy Li announced may run aground – the super-tanker may be too difficult to steer along a different course. After all, President Xi Jinping, the then new leader of the Chinese Communist Party (CCP), unveiled in 2013 a 60-point reform plan aimed at a similar target, that of easing the State’s grip on the economy in favour of encouraging consumer-led growth. Those promises ran into the sand.

Savers rather than spenders

The Chinese consumer “is the single most important thing in the world economy… The next 40 years of global growth might be about the Chinese consumer. It is very unlikely that any other country could step in to drive global consumption” said Jim O’Neill, a former Goldman Sachs chief economist in 2019 – before Covid-19 hit.

China’s anti-Covid-19 policies of the past three years encouraged saving rather than spending – many Chinese spent much of 2020 and 2021 locked away at home. Chinese households currently are sitting on “the biggest pool of new savings in history” according to the Financial Times, growing last year by the equivalent of some $2.6 trillion (a record), with the total now well above $15 trillion.

But the free-spending Chinese consumer has been a long time coming. Getting them to spend rather than save will not be a swift matter. Chinese people have been ‘encouraged’ to be savers rather than spenders by strict capital controls, which keep much of its vast household wealth within its borders. If consumption is going to get a boost, does this mean capital controls will be loosened? That would be a key step towards full international acceptance of China’s currency. Full convertibility of its currency seems a distant prospect right now – but if China really wants to challenge the Dollar, convertibility will be necessary.

The CCP has two obvious ambitions. The first is to remain in power, which translates into continued control over China’s population. The second is to achieve economic hegemony – dominance – in global affairs, and thus assert what it feels is its true destiny.

President Xi is often seen by Western observers as a dogmatic totalitarian head of state, but he may actually be capable of great flexibility. His pragmatic side was shown in the state’s response to the street-level protests against the continued Covid lockdowns – they quickly fizzled out when the zero-Covid policy was dropped, a volte-face that surprised the world.

But despite China’s size, its currency, the Yuan/Renminbi, is a pint-sized competitor on the international stage. China is the world’s biggest trader but its currency accounts for less than 2% of international settlements. That currency only constitutes about 2.25% of international reserves. The fact remains that the Yuan/Renminbi is not loved enough to become an international currency, even though the Chinese authorities have gradually, since 2004, embraced the offshore Renminbi, widely seen as the first step towards full liberalization of China’s capital account and exchange rates.

No hegemony without political change

In China the currency is a political tool, not merely a monetary device. That’s evident from China’s development of its own Central Bank Digital Currency (CBDC). The ultimate end for China is that the US Dollar is replaced by the Yuan/Renminbi. China certainly wills that end, but as yet it’s not willing the means to that end. The US has an open economy, enabling the free movement of money in and out of the country. China’s economy is closed; it imposes capital controls and money cannot move freely in and out of the country.

Moreover the rule of law is shaky in China. The CCP has shown itself willing and able to target individual entrepreneurs and their companies if they are considered to represent threats to the communist authorities. The 1993 Company Law requires all companies based in China, both foreign and domestic, to allow the establishment of units to “carry out the activities of the party” and to provide “necessary conditions” for these units to function. Many companies have ‘sleeping’ CCP officials in their boardrooms.

Sorting out the direction China is moving in is extremely difficult. So far President Xi’s ambition to topple the Dollar seems to be via backdoor routes, such as via the Renminbi Liquidity Arrangement (RMBLA), which aims to provide liquidity support and can be used by participating central banks during future periods of market volatility. Under this, each participating central bank contributes a minimum of Renminbi 15 billion or US dollar equivalent, creating a reserve pool. The arrangement initially includes the central banks of Chile, China, Indonesia, Malaysia, the Hong Kong Monetary Authority, the Monetary Authority of Singapore. By acting the role of a central bank ‘leader’ China hopes it will come to be recognised as that leader, in a de facto way.

How does the Chinese consumer fit into this evolving picture? If the CCP can convince the world that the Chinese economy is becoming more like that of the West – a ‘quiet rise’ – then maybe the Party will not have to take measures it doesn’t want to, such as doing away with capital controls. Even that is unlikely to convince the world’s central banks to convert more of their reserves to Yuan/Renminbi; for them, trust is the most valuable asset. China has yet to prove itself worthy of trust. The ‘quiet rise’ may be more successful at undermining the Dollar than a direct confrontation – and the Chinese consumer is going to be encouraged to play its part by spending more.