Year to come: China’s economic change could bring winners and losers | International Trade News

When America sneezes, the world catches the cold. So goes the saying. Now, as China embarks on what could be its most important economic change in decades, the world braces itself to test the veracity of this aphorism for its second economy and largest trader.

In a speech in August, Chinese President Xi Jinping underscored his intention to refocus the country’s economic priorities towards what he describes as “common prosperity.” The phrase, which has since become a ubiquitous slogan in Chinese Communist Party statements and state-run media reports, refers broadly to a potentially transformative effort to tackle deep-rooted income inequality after he sued. meteoric growth for four decades.

The exact contours of the campaign remain unclear, but Beijing’s crackdown over the past year on burgeoning fintech, education, real estate and gaming industries has already sounded the alarm bells in some of the fastest growing sectors in the country.

At the end of 2020, China blocked financial services firm Ant from launching what was to be the biggest IPO of all time. The government has made it harder for heavily indebted real estate developers to apply for new loans, fearing construction giant Evergrande – which has debts of over $ 300 billion – could collapse and drag the housing sector with it. him. Beijing has banned for-profit private tuition companies, disrupting a $ 120 billion industry. By early December, policy changes had wiped out $ 1.5 trillion in combined stock values.

In a speech in August, Chinese President Xi Jinping stressed his intention to refocus the country’s economic priorities towards what he calls “common prosperity”. [File: Thomas Peter/Reuters]

Analysts say a range of other emerging economies – from those fueling China’s insatiable hunger for raw materials to those dependent on Beijing for investment – are likely to feel the shakes as well.

“This will have some pretty significant external implications,” Michael Pettis, senior researcher at the Carnegie-Tsinghua Center and professor of finance at Peking University, told Al Jazeera. “And these could play for years to come.”

Reduced appetite

China has the largest number of billionaires in the world, but some 600 million citizens survive on an annual per capita income of just over $ 1,600. A rebalancing by China will almost certainly lead to “slower growth rates” during the transition, Pettis said.

This in turn will mean a reduced appetite for energy and minerals. “Commodity-dependent exporters will be hit hardest by China’s change, and countries with greater diversification will be able to overcome the change with relatively less impact,” said Ryan Hass, senior researcher at the Brookings Institution.

Russia, which exported $ 23.8 billion worth of oil to China – by far its largest export destination – in 2020, could be particularly hard hit, especially with Western sanctions already limiting Moscow’s trade with other countries in areas such as defense technology. Angola, which sells 70 percent of its crude to China, and Brazil, which ships nearly 64 percent of its oil to the East Asian nation, are also likely to bleed.

In contrast, countries like Saudi Arabia and Iraq, which export about a quarter of their oil to China, will suffer less because they are not so dependent on a single buyer. But Kazakhstan, which sells 47% of its gas to Beijing, and Indonesia, which sells coal, gas and palm oil to China – the main destination for its exports – are close to take a hit.

A surprise beneficiary could be Iran, which sells oil at subsidized prices to China – an attractive proposition for Beijing if its reforms slow economic growth.

Brazil sells 59% of its iron ore to China [File: Washington Alves/Reuters]

Then there are the other commodities that are at the heart of modern industry. Australia exports more than 85% of its iron ore to China – a dependency that could normally make a country vulnerable to threats and allures during a demand squeeze. But because Australia has “many other sources of income” other than iron, it could resist pressure to comply with China’s demands, Hass told Al Jazeera at a time when Canberra-relations Beijing are at their lowest anyway. But Brazil and South Africa, whose economies have long depended on the global commodity market, may have more difficulty – Brazil sells 59% of its iron ore and South Africa 52% to China. .

The global market for other minerals could also experience disruption. Chile, the largest exporter of copper, sells 52% of the metal to China. Peru, another key producer, is even more dependent on the East Asian giant: 68% of its copper goes to Beijing. Yet these numbers are paltry compared to China’s dominance over the cobalt industry. The Democratic Republic of the Congo is the world’s largest producer of metal, which is a central ingredient in lithium-ion batteries. And almost all of its cobalt – 98% – goes to China. “Resource-rich African states could feel the effects the hardest,” Hass said.

“Good for the world”?

If an economic downturn leads Chinese consumers to buy less electronics, the shockwaves could shake the country’s neighbors: Malaysia, Vietnam, Taiwan and the Philippines are the main sources of integrated circuits and other components that make operate everything from smartphones to televisions.

The recent wave of new regulations across multiple industries could also discourage new foreign investment in the country. “If the government creates a climate of uncertainty, it could discourage short-term investment,” said Bert Hofman, director of the East Asian Institute at the National University of Singapore.

If China’s savings rate drops, it could affect investments in its Belt and Road initiative, analysts say [File: Waldo Swiegers/Bloomberg]

But what about Chinese investments abroad, including Xi’s great Belt and Road Initiative, a global network of railways, ports, highways and other infrastructure projects that Beijing is building? , mainly through loans to other countries?

If the campaign for common prosperity succeeds in reducing economic inequalities, it should increase domestic consumption just as the purchasing power of ordinary people increases.

“China would be a consumer-driven society,” Hofman told Al Jazeera. “But that would mean less savings. And it is these savings that stimulate investment abroad, which would decline. From Ethiopia to Egypt and Vietnam to Venezuela, a large number of emerging economies that rely on Chinese investment could suffer a severe shock.

Yet China’s economic shift to the left is not necessarily bad news in the long run for most countries around the world. The increase in domestic consumption will lead to a strong recovery in demand for energy and minerals, so that economies like South Africa, Brazil and Chile that are suffering in the short term are expected to see their exports to the South. China to recover.

And if the focus on the domestic economy leads to a narrowing of the gap between China’s exports and imports – the country currently has a gigantic trade surplus of $ 535 billion – that would resolve a considerable source of imbalance in the country. the global economy, Pettis said. . “It would be good for the world,” he added.

In many ways, Xi’s latest campaign is aimed at realizing an idea articulated by the father of China’s economic reforms, former leader Deng Xiaoping. In 1986, Deng said, “Our policy is to let some people and some areas get rich first to lead and help the backward areas; the first advanced zones then have the duty to help the backward zones.

The first part of this quote has come to embody China’s rapid economic reforms, even at the cost of widening income inequality. Most Beijing watchers forgot the last part of Deng’s message. Xi and his party clearly did not.