China surprises, yet again

Since the opening of its economy a few decades ago, China has astounded observers and analysts more than a few times, be that in sheer numbers related to or in the time periods which were set to achieve major economic milestones.

Most recently, the about-face on the country’s pandemic policy caught international and domestic media outlets, local governments and many others unprepared.

In December, when the whole world was wondering what to expect in the year ahead, the sudden rollback of China’s strict Covid restrictions resulted in wild predictions being reported and discussed on all major news channels. The forecasted events ranged from the point at which the domestic Covid infection rates would peak to when the Chinese economy would return to normal and the many hiccups in manufacturing, logistics and travel would disappear.

While Chinese statistics on re-infection and death rates might not be comparable to those of other nations, it is indisputable that Covid raged through China in December and January. Yet even the most optimistic forecast did not propose a scenario in which infections peaked by early February, providing herd immunity to workforces in the country’s urban areas.

China back in the game?

With the newly gained immunity and the end of Chinese Lunar New Year, the country’s industrial base was ready to return to unhindered operations. The same was true of the logistics sector. Companies outside China have already started to see and receive Chinese delegations who are keen to reconnect, rebuild business relations and, most importantly, secure orders and investments for the Chinese economy. Due to the geopolitical situation, European companies became the preferred business partners in recent years – and now is therefore a good time to negotiate favorable contracts and sourcing agreements.

The world was expecting China to recover by the spring of 2023 at the earliest, but it was suddenly ready to go in February. The People’s Republic will no doubt surprise the world yet again due to the speed with which its economic sectors ramp up. The question, however, is whether the world is ready or well prepared enough to have China back in the game.

Analysts outside the country are calling the return of the Chinese economy potentially the biggest economic event of 2023, and they are again praising the country as the globe’s growth engine.

Fear of recession

As always, a few words of caution are in order. The industrial world is facing challenges from high inflation and the spillover risk continues to cloud the current economic outlook. It can be expected that in the course of 2023 some regions will fall into recession. Consequently, many players are wary of investing and consumers are holding on tighter than ever to their savings. Reduced government spending and the uncertainty of energy prices are weighing heavily on the working and middle class.

War in Ukraine

The war in Ukraine has changed how governments and societies feel tax revenues should be spent. Outlays for weapons have already risen significantly and will continue to do so. The arms industry will also attract private investors. The competition for capital investments has increased further. The last three years of supply chain breakdowns and geopolitical changes have made more funds willing to invest in Europe and North America. China’s long periods of lockdown and tighter government control have kept investors away due to the related uncertainties. To better prepare their supply chains for the future, many companies have been forced to rethink, developing a China+1 or China+2 strategy in order to reduce the single-source risks that many faced early in the pandemic.

Real estate crisis

After four decades of strong growth, Chinese society has experienced an economic downturn for the first time, with people losing their jobs, wages being cut and companies forced to close. China is going through its own version of the event that changed European society in the 1970s: the oil crisis.

This crisis is making entrepreneurs, government agencies and consumers review their operating models, costs of governing and spending behaviors. For example, decades of overreliance on the country’s massive real estate industry have led to the current real estate crisis. Regulations, coupled with lack of demand and capital, are chipping away at the biggest growth industry in China. A series of disciplinary measures against high-profile private sector companies has left many entrepreneurs anxious of pursuing other business opportunities. In addition, diminishing government spending on large infrastructure projects and limitations on private investment channels are creating real challenges for China’s government, economy and society.

Pressure to automate

In 2022, China experienced its first decline in population in six decades. The working-age population has been shrinking for at least 11 years. This is putting pressure on manufacturing sectors to boost automation and smart manufacturing. Automation upgrades require capital and a well-educated workforce. This could increase the relevance of technical universities and apprenticeship programs, something that would, however, require a change of mindset among Chinese society. The situation is further complicated by the 10 million students who graduate every year from college or university, many of whom have no job prospects and/or are not willing to work in a factory or the service industry. China is a rapidly ageing society with fast changing needs for services – and reduced savings potential. These facts further complicate finding solutions or repositioning the Chinese economy for the future.

Inflationary pressure

The Chinese economy is returning to normal, and the markets have already reacted: Prices for raw materials have increased, given expectations that China will start to consume more. It remains to be seen what the actual effects will be; it can be safely assumed, however, that such expectations will put even more inflationary pressure on economies all around the world.

Half full or half empty

Predictions of what is coming often depend on the writer’s or reader’s view: Is the glass half full or half empty? Too many times, the challenges faced by China have been used to paint a doomsday scenario – and every time that scenario has been proven wrong. In each challenge also lies an opportunity. China is pragmatic, if nothing else. It will continue to surprise us with solutions that observers and analysts outside of China have not seen coming. In doing so, it will create new challenges and opportunities that either further compound or ease the global economic situation.

China is the second biggest economy. Therefore, it is highly crucial that economic players in Europe engage with their Chinese counterparts as well as industry regulators and government officials to understand the five year strategies that are being drawn up or that are already in play. This will allow both sides to voice concerns and change tactics, thereby ensuring fairer market shares and market positions for European organizations in and outside of China. If you have not already scheduled a visit to China or a meeting with your Chinese counterparts, there’s no time to lose.