When America sneezes, the world catches a cold. So goes the saying. Now, as China embarks on what could be its most far-reaching economic shift in decades, the world is bracing for a test of just how true that aphorism will prove for its second-largest economy and biggest trader.
In an August speech, Chinese President Xi Jinping underscored his intentions 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 in reports published by state media, broadly refers to a potentially transformative effort to tackle deep-rooted income inequality after chasing breakneck growth for four decades.
The exact contours of the campaign remain unclear, but Beijing’s crackdown over the past year on the nation’s booming fintech, edutech, real estate and gaming industries has already sent alarm bells ringing in some of the country’s fastest-growing sectors.
In late 2020, China blocked financial services firm Ant from launching what was expected to be the biggest IPO ever. The government has made it harder for property developers in deep debt to seek further loans, amid worries that construction giant Evergrande — which has debts in excess of $300bn — could collapse and take the housing sector down with it. Beijing has banned for-profit private tuition companies, upending a $120bn industry. By early December, the policy changes had erased $1.5 trillion in combined stock values.
Analysts say a range of other emerging economies — from those that feed China’s insatiable hunger for raw materials to those dependent on Beijing for investment — are likely to feel the tremors, too.
“It will have pretty substantial external implications,” Michael Pettis, Senior Fellow at the Carnegie-Tsinghua Center and a professor of finance at Peking University, told Al Jazeera. “And those might play out for years to come.”
China has the world’s highest number of billionaires but some 600 million citizens survive on an annual per capita income barely above $1,600. A rebalance by China is almost certain to lead to “slower growth rates” during the transition, said Pettis.
That in turn will mean a reduced appetite for energy and minerals. “Commodity dependent exporters will be hit hardest by China’s shift, and countries with greater diversification will be able to weather the shift with relatively less impact,” said Ryan Hass, Senior Fellow at the Brookings Institution.
Russia, which exported $23.8bn worth of oil to China — by far its single largest export destination — in 2020, might hurt particularly badly, especially with Western sanctions already limiting Moscow’s trade with other nations in areas such as defence 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, will likely bleed too.
By contrast, countries like Saudi Arabia and Iraq, which export about a quarter of their oil to China, will suffer less — because they are not as heavily dependent on a single buyer. But Kazakhstan, which sells 47 percent of its gas to Beijing, and Indonesia, which sells coal, gas and palm oil to China – the biggest destination of its exports – are poised to take a hit.
A surprise beneficiary could be Iran, which sells oil at subsidized rates to China – an attractive proposition to Beijing if its reforms slow economic growth.
Then there are the other commodities that are central to modern industry. Australia exports more than 85 percent of its iron ore to China — a reliance that might ordinarily make a country vulnerable to threats and allurements during a demand squeeze. But because Australia has “many other sources of revenue” other than iron, it might withstand the pressure to buckle to China’s demands, Hass told Al Jazeera, at a time Canberra-Beijing relations are in any case at a low. But Brazil and South Africa, whose economies have long depended on the global commodity market, might struggle more — Brazil sells 59 percent of its iron ore, and South Africa 52 percent, to China.
The global market for other minerals could also witness disruptions. Chile, the biggest exporter of copper, sells 52 percent of the metal to China. Peru, another key producer, is even more dependent on the East Asian giant — 68 percent of its copper goes to Beijing. Yet these numbers pale in comparison to China’s dominance of the cobalt industry. The Democratic Republic of the Congo is the world’s largest producer of the metal, which is a central ingredient in lithium ion batteries. And almost all of its cobalt — 98 percent — goes to China. “Resource-rich African states could feel the effects most sharply,” said Hass.
‘Good for the world’?
If a slackening economy leads to Chinese consumers buying fewer electronic goods, the shock waves could rattle the country’s neighbors: Malaysia, Vietnam, Taiwan and the Philippines are chief sources of the integrated circuits and other components that run everything from smartphones to television sets.
The recent rash of new regulations on multiple industries might also disincentivize fresh foreign investment into the country. “If the government creates a climate of uncertainty, then that could deter investments in the short term,” said Bert Hofman, Director of the East Asian Institute at the National University of Singapore.
But what about China’s own overseas investments, including Xi’s grand Belt and Road Initiative, a global network of railroads, ports, highways and other infrastructure projects that Beijing is building, mostly through loans to other nations?
If the common prosperity campaign succeeds in bringing down economic inequality, that should increase domestic consumption as the spending power of ordinary people would increase.
“China would be a consumption-driven society,” Hofman said to Al Jazeera. “But that would mean less savings. And it is those savings that drive overseas investments, which would decline.” From Ethiopia to Egypt and Vietnam to Venezuela, a large number of emerging economies that count on Chinese investments might be in for a rude shock.
Yet China’s economic left turn is not necessarily bad news for most of the world in the long run. Increased domestic consumption will lead to a strong revival in demand for energy and minerals, so economies like South Africa, Brazil and Chile that suffer in the immediate term should see their exports to China recover.
And if a focus on the domestic economy leads to a drop in the gap between China’s exports and imports — the country has a gigantic, $535bn trade surplus at the moment — that would fix a considerable source of imbalance in the global economy, said Pettis. “It would be good for the world,” he added.
In many ways, Xi’s latest campaign aims at delivering on an idea outlined by the father of China’s economic reforms, former leader Deng Xiaoping. In 1986, Deng had famously said: “Our policy is to let some people and some areas get rich first to drive and help the backward areas; first advanced areas later have the duty to help the backward areas.”
The first bit of that quote has come to embody China’s rapid economic reforms, even at the cost of widening income inequality. Most Beijing watchers forgot the latter part of Deng’s message. Xi and his party clearly did not.