There is news from behind the bamboo curtain. The National Bureau of Statistics has confirmed officially that the growth rate in the Gross Domestic Product in China sank to three percent in 2022, the second lowest since 1974. What is more shocking is that the GDP of China actually declined in 2022 compared to the year before. Since the U.S. dollar is the most widely used currency in international trade since the end of World War II, it is reasonable to argue that the size of the Chinese economy actually shrunk in 2022. In terms of the U.S. dollar, the GDP of China declined from $18 trillion in 2021 to $17.94 trillion in 2022.
The growth rate of three percent which has been achieved in terms of the Chinese yuan is still the slowest growth rate of GDP in the Chinese economy since the growth rate of 2.3 percent registered in 1974; which was in the period of the chaotic Cultural Revolution in China. Thus, the attempts by President of China Xi Jinping to take China back to the days of Mao Zedong seem to have unleashed chaos in the Chinese economy. The official growth rate of three percent is far below the target of 5.5 percent fixed by the authorities earlier. In between, there has been a sharp rise in the price of the dollar against the Chinese yuan, resulting in China recording a negative growth rate in dollar terms. Clearly, the price of the U.S. dollar has increased because it is in high demand, being the reserve currency of the world; while the Chinese yuan has failed to keep pace because it has little demand globally. In 2015, the International Monetary Fund included the Chinese yuan in its basket of reserve currencies, leading to the hope in Beijing that yuan would emerge as a major global currency. Experts point out, however, that the chance of the yuan being used widely worldwide is next to zero. Seventy percent of the supposedly international transactions in yuan take place in Hong Kong, which does not truly reflect the international demand for yuan. The financial market in Hong Kong functions under the tight political control of China.
This shows that quiet attempts by Beijing to dethrone the U.S. dollar as the global currency and replace it by the Chinese yuan have failed. China has been trying to leverage the Shanghai Cooperation Organization to promote local currencies for bilateral settlements. As recent events show, however, this has met with only a limited degree of success. In the wake of American sanction of Russian banks following the outbreak of the Ukraine war, important Chinese banks like the Bank of China and the Industrial and Commercial Bank of China immediately stopped processing transactions with Russian entities. Only small Chinese banks that do not have much exposure to the dollar-based global financial system practise alternative payment and settlement mechanisms.
In a September 2022 report, the BBC said the internationally traded yuan had fallen to its lowest level since 2011 when data first became available. Since the global financial crisis of 2008, the Chinese currency has reached its weakest point. In troubled times in the wake of the Covid – 19 pandemic, people see the dollar as the safe place to put their money in, avoiding risks; not the Chinese yuan. Analysts say the fall in the value of yuan will help exporters within China in only a limited way. This will not turn around a fundamentally weak Chinese economy as exports now make up for only about 20 percent of the Chinese economy. A weak currency and uncertainties in the financial market will lead investors to pull their money out of the country. The central bank of China is cutting key interest rates to stimulate the sputtering Chinese economy, reeling under the twin effect of draconian zero-Covid measures and a crisis in the real estate sector; but this will lead to a capital outflow from China because of the yield differential between China and the U.S. which has adopted a tight money policy to rein in the inflation, say financial experts.
The mouthpiece of the Communist Party of China Global Times has expressed the hope that the rapid weakening of the yuan will boost the sagging exports of China; but this is unlikely to happen, say analysts. For, the bottoms have been knocked out of the fundamentals which had propelled the rapid growth of the Chinese economy for decades at a stretch. Managing the economy at the margins by tinkering with the interest rate or the exchange rate is no longer going to be of enough help. In fact, Vice Chairman for China Society for World Trade Organization Studies in Beijing, Huo Jianguo, has sounded a pessimistic note. He has been quoted in the Global Times article, saying: “China is not only a major exporter but also a big importer, purchasing large amounts of energy and raw materials from around the world every year. Therefore, while the devaluation of the yuan is good for exports, it also takes into account the resulting rise in import costs and imported inflation.” The fall in the Chinese economy has led to the depreciation in the exchange rate of yuan, while the U.S. dollar has gained strength in the global market.
China in the past did not achieve the phenomenal growth rate led by exports on the strength of an undervalued yuan, observers point out. It did so, on the strength of the hard working common Chinese people whom the mandarins of the CPC exploited to keep production costs low. In this way, China had outbid products from other countries in the international market by keeping prices low. International capital was attracted to China to set up production units to take advantage of the low wages. The large population base of the country and a high growth rate of population led to an abundant supply of labour and low wages. Now, however, with a declining rate of population growth, China is set to lose this comparative advantage. Besides, keen to have a share in the affluence in which the mandarins of the CPC lead their lives, the ordinary Chinese worker also wants a higher wage rate.
The National Bureau of Statistics of China has made another disquieting revelation together with the one on the falling growth rate. In 2022 the population size of China has actually declined, for the first time since 1961; which was the period of the great famine in China. According to official figures released by the NBS, the total population of China in 2022, at 1.4118 billion, fell by 850,000 from the 2021 figure. In 2022, China registered 9.56 million new-borns, down from 10.62 million in 2021. Ordinarily, in an overpopulated country, this should have been welcomed as common people would enjoy a higher standard of living; but not so in China where common people are not regarded as human beings but as mere tools to produce wealth in the interest of the CPC mandarins. Spokesman of the Foreign Ministry of China Wang Wenbin said on January 17, 2023, that the advantage of a big population lay in an ample workforce which functioned as a strong internal dynamic for economic development.
The concern of China is not simply a declining population, however, but also a rapidly ageing population. This will render a large section of the population of China being of not much use as a workforce. According to official data from the NBS, the working age population in China, between 16 and 59 years, is now about 875 million; accounting for 62 percent of the total population. The population aged 60 years or above is about 280 million, or about 20 percent of the total population. About 210 million people are above the age of 65 years, accounting for 15 percent of the total population. “The decrease in the number of working-age people will lead to a much lower economic growth and higher labour costs as the population shifts to care for its elderly,” the World Economic Forum has noted in the context of China.
The Washington Post has been succinct in explaining the implication of this changing demographic structure in China. “If a decline in the number of people in the working age leads to a drop in how many people are actually working, that may raise the cost of labour in China, adding to the price of manufactured goods.” This will not only make Chinese products less competitive in the international market, but also China may lose its status of being the ‘factory of the world.’ The demand for housing may also go down in the coming days, deepening the crisis in the real estate sector of China.