For decades, German companies have participated in China’s economic rise. Initially, inexpensive primary products made in China enabled German industry to keep a large proportion of its added value in Germany, a high-wage country. With the growing prosperity of hundreds of millions of employees, the huge country then also became interesting as a sales market and finally as a production location for machines and cars designed in Germany.
China rose to become Germany’s most important trading partner. Within 30 years, German exports to China increased forty-fold, and German imports from this economy increased almost thirty-fold. By way of comparison, trade with the US quadrupled over the same period.
In the pre-Corona year 2019, VW generated around 40 percent of its group sales in China, and it was hardly less at the chip manufacturer Infineon. At BMW and Daimler, the shares were around 30 percent, at Covestro and Adidas around 20 percent.
Cracks in the Chinese economic miracle became apparent at the latest when the corona broke out a good two years ago. Initially, the economy got through this pandemic quite well: in 2020, the economy only grew by 2.3 percent, but in 2021 it was back by 8.1 percent.
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Recently, however, there has been a slowdown that is worrying. In the last quarter of 2021, China’s economy grew by only 1.6 percent compared to the previous quarter. Economic experts even see growth of only one percent for the current quarter, and in 2022 as a whole it is unlikely to be more than four to five percent.
That may seem like a lot compared to Europe, but by Chinese standards this increase is modest. If the government sticks to the zero-Covid strategy, China’s economy is likely to expand more slowly than the global economy this year – the world’s long-standing growth engine would stutter.
China has an omicron problem as domestic vaccines against this mutation appear to be largely ineffective. Therefore, the upcoming Winter Olympics give cause for concern, despite the isolation of the teams.
The International Monetary Fund (IMF) therefore advised Beijing to abandon its previous Covid strategy. The related restrictions proved to be a burden for both the Chinese and the global economy, stressed IMF chief Kristalina Georgieva. The weaker growth of the second largest economy in the world is not least due to the fact that there are always abrupt closures.
Corona harbors many economic risks
In fact, the authorities are responding to even limited outbreaks with rigid measures: entire megacities have been sealed off for weeks and major commercial ports have been closed. These local lockdowns significantly disrupt the global flow of goods. The deliveries from China, which were previously clocked almost to the hour, are increasingly missing. The result: There is a shortage of materials, primary products and consumer goods around the world, while prices are rising sharply.
Corona does not only entail short-term economic risks; the virus will probably change the global economy permanently with China. President Xi Jinping is apparently aiming to turn the country into a self-sufficient fortress that is said to be less and less dependent on imports and foreign corporations. China is opening up new sales markets and cheap production facilities along its “New Silk Road”. Foreign producers would only be welcome if they offer goods that the country cannot (yet) produce itself.
In any case, the course has been set for this course. The five-year plan, which is valid until 2025, provides for strengthening domestic companies and detaching them from foreign technology and world trade – “Buy Chinese” is the answer to “America first”.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
In addition, one should know that no rational behavior can be expected from China when it comes to its “national interests”, i.e. Taiwan, Hong Kong or Xinjiang. The state leadership does not shy away from conflicts, even if they could result in disadvantages for their own country. The past few months have also revealed the economic damage that can occur in the West simply as a result of a lack of supplies from China. It is quite possible that Xi will use this new weapon in a targeted manner in the future to underscore geopolitical interests.
But even if China does not isolate itself further and there are no major trade conflicts with the West, it is foreseeable that Beijing will soon be confronted with massive demographic problems. In 2021, only 10.62 million children were born in China, 10.5 percent fewer than in the previous year. This is not due to Corona, because the number of births has fallen for the fifth year in a row and is now at its lowest level since the founding of the People’s Republic in 1949.
There were only 7.52 births per 1000 inhabitants – for comparison: in Germany this rate is 9.4. All appeals and government measures to increase the birth rate have so far come to nothing. China is therefore likely to turn gray even faster than Germany or South Korea.
The proportion of old people in China will increase rapidly
The last official census showed that in 2020 China’s population virtually stagnated at 1.4 billion people. Foreign observers doubt these data and speculate that the population may already have fallen below 1.3 billion people. If the current reproductive behavior is continued, the population is expected to drop to around one billion people by the end of this century, compared to the level in the 1980s.
Fewer births and increasing life expectancy mean that the proportion of old people is increasing rapidly. In 2010, 13.3 percent of the Chinese were over 60 years old, by 2020 this proportion was already 18.7 percent – and the trend is rising sharply. However, no serious consideration has been given to raising the statutory retirement age from 60 years.
Aging will have serious social and economic consequences: the labor supply will fall, the shortage of skilled workers will slow down growth, and because of the hitherto insufficient social security, the already high savings rate would increase, which would dampen private consumption. The construction boom, which is largely responsible for the rapid economic growth, is likely to ebb, while care and health expenditure will rise instead. And whether China’s economy will emerge as a winner from the green transformation of the world is by no means certain.
Fears of a looming loss of importance have triggered many an international conflict. This applies in particular to regimes whose power is not democratically legitimized and controlled and which therefore often threatens to be lost surprisingly quickly. This does not have to result in military conflicts, but it often conjures up nationalism and protectionism.
The current developments in the Middle Kingdom should therefore be a warning signal for export-oriented economies – all China strategies should be put to the test.
More: Against the slowdown in economic growth: China continues to ease monetary policy