Ever since Xi Jinping came to power in China, its economic narrative has shifted. What was considered an endless miracle of growth before his rise, transformed afterward into an endless critique of unbalanced growth. Xi launched major reforms from 2012 to 2015 that aimed for structural transformation in the Chinese economy from investment to consumption. And from industry to services. It has had some halting success as the services share of output rises faster than industry falls:
And the investment share has diminished:
But, of course, this means much slower growth:
After 2015, and a few times since, growth slowed so sharply as a result of these reforms that the CCP was forced to juice investment again, lest the masses get restive. But the trend to lower growth and higher-quality growth is still intact.
Now, as we head onto the latest National Congress, Bloomberg has an essential report on what comes next:
- The National Congrees will prioritise investment into 30 “chokehold technologies”.
- This is given greater urgency by US-led moves to contain China.
- It includes everything from chips to EVs.
- Investment is set to rise 40% to $1.4tr over five years.
- State-directed investment may fail.
This is all well understood by development economists as a part of catch-up growth. The story begins with cheap labour exports and abundant investment into sub-development infrastructure. As labour is exhausted and costs rise, plus investment options dwindle, the economy needs to keep moving up the value chain to lift exports and productivity or it will slump into the middle-income trap and bog down for good.
China knows all of this. Its problem is twofold:
- Controlling vested interests that rose through the first phase of growth.
- Not slowing too quickly will jeopardise an autocratic political system that relies upon growth for legitimacy.
So, we’ve had nearly ten years of China with its foot on both the growth pedal and the brake which has meant its great transition is over ever half-arsed. More lately, we’ve seen the rise of Angry China as the CCP shifts the basis of its legitimacy to nationalism.
But, that Cold War must also change CCP priorities. It must accelerate the rebalancing lest it gets choked off. Hence we see this huge investment in tech.
The more that happens, the less will need to go into the traditional investment areas of infrastructure and realty. The urbanisation pulse won’t stop but it will steadily fade:
For those currently spruiking a new “commodity supercycle”, especially for bulk commodities, there is a China-sized fly in their soup.