A Weary
Superpower
China Won't Save Us This Time
With massive investments around the world, China
helped to prop up the global economy after the 2008 financial crisis. But this
time around, the country is busy taking care of itself.
By Georg
Fahrion in Beijing
12.06.2020,
09.33 Uhr
"We
kindly welcome you onboard our first passenger flight to China since the start
of the coronavirus crisis." The captain's voice crackles over the
intercom, addressing the around 180 passengers who have boarded the Lufthansa
jet at the Frankfurt Airport. They are mainly technicians and executives from
German car and machine manufacturers who are being sent back to their Chinese
factories. There are also a few pregnant women eager to see their partners
again. Many have children on their laps. There are also a few diplomats and
journalists.
China
closed its borders to foreigners at the end of March, when the epidemic was
dying down there but flaring up in the rest of the world. Those borders were
reopened on the last weekend in May for a group of representatives of German
industry, with Beijing hoping that the foreigners will give China's economy a
much-needed boost. There are some 5,000 German companies with branches in
China.
China has
accounted for a third of all economic growth around the world in the past 10
years. Many hopes are pinned on the country that, during the financial crisis
more than a decade ago, spent 450 billion euros ($511.2 billion) on domestic
stimulus measures, thus making a decisive contribution to preventing the total
collapse of the world economy. Will China play a similar role this time around?
Will it emerge from the current crisis more powerful than before? Or has the
coronavirus also caused lasting damage to the Chinese economy?
A Fragile
Recovery
The country
is being extremely careful, even as it allows the Germans to gradually return,
and for weeks, Germany and China have been negotiating over passenger lists and
visa and quarantine regulations.
Before
departing from Frankfurt, all passengers are tested for Sars-CoV-2 and masks
must be worn at all times onboard. To minimize contact between flight
attendants and passengers, in-flight service has been cancelled, with each
passenger receiving a 1.5-liter bottle of water and a large box of snacks.
Flight attendants take passengers' temperatures every four hours.
Upon
arrival at the airport in Tianjin, 130 kilometers (80 miles) from Beijing,
hundreds of medical staff are waiting. They wear protective suits, face masks
and gloves, and have plastic shields in front of their faces. They take
passengers' temperature again, help them install an official health app and
take samples of saliva, nasal secretions and blood. It's a hive of activity,
and all the paperwork must be in order. It takes more than an hour.
Buses then
take the new arrivals to a hotel that has been designated by the authorities.
Nervous employees escort the guests in through the back entrance after
disinfecting their luggage with a spray pump. Then the doors slam shut. No one
is allowed to leave their room during quarantine.
The whole
procedure is symbolic of China's approach to the current crisis. The country
has closed itself off and is exercising extreme caution. There is a widespread
fear that the country could lose all of the hard-won progress it has made and
that the pandemic could return. And that the country could be dragged down into
the global economic downturn.
Inside
China, the virus has been largely contained. That fact, along with the measures
that have been taken to seal off the country from the outside world, have made
it possible for the economy to recover slightly. But it's still too weak to
lift the global economy along with it. And the progress that has been made is
fragile.
Time for a
Nice Car
The Festo
Group, based in the German city of Esslingen, has a plant in Jinan in eastern
China, and when DER SPIEGEL paid a visit back in late 2019, an employee showed
off an immaculate production facility. There was no dust on the floor,
hazardous areas were clearly marked and there were signs all over about
workplace safety. From its Jinan plant, Festo Group supplies the Chinese market
with control assemblies and automation technology. Its customers are in
biopharmaceuticals, the automotive sector and the food and packaging
industries.
These days,
production is once again up and running. In January, the Chinese New Year and
the outbreak of the epidemic led to a two-week standstill at Festo, but since
March, sales have exceeded budget goals, reported Thomas Pehrson, the company's
managing director for China, in an early May email. Despite all the
uncertainties, he expects the "recovery trend in all sectors" to
continue.
At the time
of his email, Pehrson said production levels at the factory were 20 percent
higher than normal, adding: "And we forecast this lasting for at least the
next two quarters." Of course, Festo is also benefiting from a special
circumstance: The company supplies several manufacturers of respiratory masks,
producers of ventilation equipment and firms working on vaccines.
But there
is also cause for hope in the automotive industry, which suffered a
catastrophic slump at the beginning of the year. In May, sales in that sector
were 12 percent higher than in the same month last year. After two years of
sluggishness, Chinese industry has finally begun to pick up again since April.
"The automotive industry is buzzing. It's really amazing," says Jörg
Wuttke, the president of the EU Chamber of Commerce in China (EUCCC). Since
customers are daring to go outside again, the Porsche showroom in Beijing, for
instance, has been packed. "Fact is, there's a wealthy upper class that thinks
now is the time to get a really nice car." That's true, at least, for the
premium sector, he said.
Even the
industries hit the hardest by the coronavirus, such as tourism, are recovering
now that the authorities have relaxed strict travel restrictions. During
China's Qingming festival, a three-day commemoration of the dead, some 43
million Chinese booked domestic trips. A month later, during the five-day May
holiday, China's travel industry registered a total of 115 million travelers.
That's a significant increase, though still a long way from the 195 million who
traveled during the May holidays in 2019.
The Tunnel
Is Only Just Beginning
The retail
sector is headed in a similar direction; it's picking up noticeably, though
it's still well below last year's levels.
The
Purchasing Managers' Index (PMI), surveyed by the business magazine Caixin,
rose to 54.4 in May versus 47.6 in April. A PMI value above 50 indicates an
expansion of economic activity, below 50 a contraction. The composite index
encapsulates both the manufacturing industry and the service sector. "A
month ago, the recovery was still on somewhat sandy ground, today it's a little
firmer, but not yet concrete," says Jens Hildebrandt, head of the German
Chamber of Commerce in Beijing.
Eighty to
90 percent of the companies resumed production in early May, according to
economic expert Seung-Youn Oh from Bryn Mawr College in Pennsylvania.
"Compared to January and February, when everything came to a standstill,
we are back to normal," but companies are a long way from having recovered
their losses, she says.
And many of
the indicators that initially seemed encouraging have sobering explanations.
Sure, production increased, but this was apparently mainly because companies
had replenished their stocks. In contrast, order intake in April was down. By
the same token, the significant increase in exports in April was probably also
due to the fact that Chinese container ports had been idle for much of the
first quarter and are only now working through the backlog.
"Of
course, everyone is hoping for the light at the end of the tunnel, but we only
just drove in," says Max Zenglein, chief economist of the Berlin-based
Mercator Institute for China Studies (MERICS). He thus warns against placing
too much hope in China.
At the
beginning of the pandemic, the China-based supply side dried up, says the
economic expert Oh. "Now demand is shrinking in the developed world."
The country hasn't been as dependent on exports as it once was in a long time.
Their share of gross domestic product has halved since the mid-1990s to 17.4 percent.
Individual companies and regions, however, will nevertheless be hard hit by
weak global demand, including the 113 million-strong province of Guangdong,
which includes the Pearl River Delta, home to many of the country's exporters.
Prosperity
for Power
Since China
began publishing its quarterly figures in 1992, the economic situation has
never been as dire as it is now. Even at the height of the global financial
crisis, growth in China fell by only 2.4 percentage points quarter-to-quarter.
In the first quarter of this year, it was down by 12.8 percentage points.
"The first time I looked at the numbers..." Zenglein says hesitantly.
"I don't think there's an economist alive who's ever seen anything like
this." Of course such an abrupt interruption was going to have a
significant impact on employment, and according to China's National Bureau of
Statistics, unemployment stood at 6 percent in April, after 5.9 percent in
March and a record 6.2 percent in February. Historically, the rate has hovered
around 4 percent, making it hard to believe that the new figures paint a
realistic picture.
One doesn't
even need to assume political manipulation to doubt the statistics. It's enough
to look at the methodology. For a long time, the statistics excluded the nearly
300 million migrant workers who, for lack of an urban household registration,
are not entitled to such transfer payments. In 2018, the calculation was
adjusted. It's now based on surveys which, though they now include migrant
workers, are only conducted in cities. But they ignore the situation in the
countryside, where many domestic migrant workers return to their rural homes
when they lose their jobs.
At the end
of April, analysts with the securities trader Zhongtai Securities reported that
according to their calculations, 70 million workers had lost their jobs in the
wake of the coronavirus crisis. If accurate, that would translate to an
unemployment rate of 20.5 percent. The company withdrew the report the same
day, possibly due to an intervention by the authorities, but at the end of May,
Gavekal Dragonomics followed with their own report. Analysts there put the
number of unemployed at 60 to 100 million.
They also
coincide with another record. Some 8.5 million students will graduate from
China's universities this year. If many of them are unable to find jobs, or
only unappealing ones, the problem would thus spread to the middle class.
An
oft-repeated anecdote holds that U.S. President George W. Bush once asked his
counterpart Hu Jintao what kept him awake at night. Bush said that he feared a
second 9/11. His Chinese colleague replied that what robbed him of sleep was
the knowledge that he had to create tens of millions of new jobs every year.
Because that is the foundation of the Chinese social contract. The Communist
Party provides work, income and prosperity for its citizens, while in return,
the people accept the party's authoritarian rule. High unemployment would
create a problem of legitimacy.
Support for
SMEs
Zenglein,
the economist, emphasizes that China has never had to contend with a recession
since the beginning of the reform era in the late 1970s. As a result, the
country lacks the mechanisms and the experience to deal with such an unfamiliar
situation. "I wouldn't say that China has forgotten to build up social
security systems, but it has neglected them a bit. When you've been growing 10
percent annually for decades, such issues are not a priority."
At the
recent National People's Congress, Prime Minister Li Keqiang made clear what
China's leadership sees as its key economic policy tasks for the coming period:
"The protection of jobs, livelihoods and market entities." In other
words: The people must not be allowed to fall back into poverty. A massive wave
of bankruptcies is to be avoided.
To prevent
this, Beijing is even breaking with economic policy dogmas. The budget deficit
is expected to rise above 3 percent, long viewed as the highest acceptable
rate, to as high as 3.6 percent. In addition, for the first time in many years,
the government is foregoing a nominal target for economic growth. "This is
really overdue and should be welcomed," says EUCCC President Wuttke.
"Otherwise, people will be tempted to boost the gross national product at
all costs. Whoever digs a pit and then fills it back up again, according to
this logic, has performed two tasks for the gross national product." Not
setting a target is a clear message, Wuttke says: "No money will be wasted
here."
Local
governments and companies have begun issuing vouchers and coupons worth
billions in order to boost consumption while a reduction in VAT tax is also
intended to have the same effect. The government plans to expand unemployment
benefits. A temporary suspension of corporate income tax, reduced social
security contributions and extended credit periods are aimed at providing
relief for small and medium-sized enterprises. Recently, it was announced that
the government wants to make an additional 50 billion euros ($56.9 billion) in
loans available to them through regional banks.
"I don't think there's an economist alive who's
ever seen anything like this."
Max Zenglein, chief economist at MERICS
These
companies are the linchpin of the crisis. They provide four out of five urban
jobs -- and 85 percent of these companies would slide into bankruptcy within
three months without additional financial assistance. That's according to a
survey conducted jointly by Beijing University and Tsinghua University in
February. The government therefore instructed major banks to increase lending
to these businesses by 40 percent. Traditionally, the banks have preferred to
loan to state-owned enterprises, because unlike private businesses, in effect
they cannot go bankrupt.
Problems
Remain
China wants
to invest heavily like it did during the global financial crisis. But unlike
then, the measures are "not geared at big infrastructure projects,"
says Prime Minister Li. Instead of new railway lines and airports, the money
will this time go primarily into digital infrastructure like 5G networks, data
centers or artificial intelligence. This could widen the lead that China, in
part, already enjoys over the West in some of these sectors. To this end,
Beijing plans to issue bonds worth 470 billion euros this year, an increase of
200 billion euros over the previous year. Chinese IT companies and network
equipment suppliers will likely be the main beneficiaries. The rest of the world
will have to wait.
The
investment program is unlikely to diffuse China's trade conflict with the U.S.,
which has long since developed into a tech war. This is especially true now
that the antagonism is more than just atmospheric. U.S. President Donald Trump
recently announced that Hong Kong would be stripped of its trade privileges
because, from his perspective, the city can no longer be considered autonomous
from China. Beijing is said to have already retaliated by instructing several
state buyers to cancel orders for U.S. soybeans and pork. China buying more
agricultural products from the U.S. was a fundamental part of the Phase 1 trade
deal that was concluded in January. Nevertheless: Of the $36.5 billion in
purchases promised for 2020, the Chinese only ordered $3.4 billion in the first
quarter, their lowest amount since 2007.
This time
around, China won't be a driver of global growth. After all, the fear of a
second wave of coronavirus infections still looms.
One of the
passengers on Lufthansa flight LH342 to Tianjin last Friday was a 34-year-old
engineer. Like all of his fellow travelers, he was tested for SARS-CoV-2 and
the result came back negative. The man from the small town of Blaustein in the
state of Baden-Württemberg exhibited no symptoms and his body temperature was
36.3 degrees Celsius (97.3 degrees Fahrenheit), as the Tianjin Health
Commission would later announce.
Shortly
after arrival, at around noon on Saturday, he was separated from the other
Germans and tested again, this time producing a positive result The man is
apparently the carrier of an asymptomatic infection. The Chinese took him to a
local hospital where they put him under medical observation.
Some of his
fellow travelers had hoped to be allowed to leave the central quarantine hotel
after only 48 hours, thanks to a special arrangement. The authorities, however,
quashed that hope. Everyone is now stuck in their rooms for two weeks. The
virus has yet to be defeated.
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