Business
China’s economic problems mean for the world
There is a saying that when the United States sneezes, the rest of the world catches a cold. But what happens when China is unwell?
The world’s second-largest economy, home to more than 1.4 billion people, is facing a host of problems – including slow growth, high youth unemployment and a property market in disarray.
Now the chairman of the country’s heavily indebted real estate developer, Evergrande, has been placed under police surveillance and the company’s shares have been suspended on the stock market.
While these issues add up to a major headache for Beijing, how much does it matter to the rest of the world?
Analysts believe worries of an impending global catastrophe are overstated. But multinational corporations, their workers and even people with no direct links to China are likely to feel at least some of the effects. Ultimately, it depends on who you are.
Winners and losers
“If Chinese people start cutting back on eating out for lunch, for example, does that affect the global economy?” asked Deborah Elms, executive director of the Asian Trade Centre in Singapore.
“The answer is not as much as you might imagine, but it certainly does hit firms who directly rely on domestic Chinese consumption.”
Hundreds of big global companies such as Apple, Volkswagen and Burberry get a lot of their revenue from China’s vast consumer market and will be hit by households spending less. The knock-on effects will then be felt by the thousands of suppliers and workers around the world who rely on these companies.
When you consider that China is responsible for more than a third of the growth seen in the world, any kind of deceleration will be felt beyond its borders.
The US credit rating agency Fitch said last month that China’s slowdown was “casting a shadow over global growth prospects” and downgraded its forecast for the entire world in 2024.
However, according to some economists, the idea that China is the engine of global prosperity has been exaggerated.
“Mathematically, yes, China accounts for around 40% of global growth,” says George Magnus, an economist at the University of Oxford’s China Centre.
“But who is that growth benefitting? China runs a huge trade surplus. It exports so much more than it imports, so how much China grows or doesn’t grow is really more about China than it is about the rest of the world.”
Nevertheless, China spending less on goods and services – or on housebuilding – means less demand for raw materials and commodities. In August, the country imported nearly 9% less compared to the same time last year – when it was still under zero-Covid restrictions.
“Big exporters such as Australia, Brazil and several countries in Africa will be hit hardest by this,” says Roland Rajah, director of the Indo-Pacific Development Centre at the Lowy Institute in Sydney.
Weak demand in China also means that prices there will stay low. From a Western consumer perspective, it would be a welcome way of curbing rising prices that does not involve further raising interest rates.
“This is good news for people and businesses struggling to deal with high inflation,” Mr Rajah says. So in the short-term, ordinary consumers may benefit from China’s slowdown. But there are longer term questions for people in the developing world.
Over the last 10 years, China is estimated to have invested more than a trillion dollars in huge infrastructure projects known as the Belt and Road Initiative.
More than 150 countries have received Chinese money and technology to build roads, airports, seaports and bridges. According to Mr Rajah, Chinese commitment to these projects may start to suffer if economic problems persist at home.
“Now Chinese firms and banks won’t have the same financial largesse to splash around overseas,” he says.
China in the world
While reduced Chinese investment abroad is a possibility, it is unclear how else China’s domestic economic situation will affect its foreign policy.
A more vulnerable China, some argue, may seek to repair damaged relations with the US. American trade restrictions have partly contributed to a 25% drop in Chinese exports to the US in the first half of this year, while US Trade Secretary Gina Raimondo recently called the country “uninvestable” for some American firms.
But there is no evidence to suggest China’s approach is softening. Beijing continues to retaliate with restrictions of its own, frequently blasts the “Cold War mentality” of western countries and appears to maintain good relations with authoritarian leaders of sanctioned regimes, such as Russia’s Vladimir Putin and Syria’s Bashar Al-Assad.
At the same time, a stream of US and EU officials continue to travel to China every month to keep up talks on bilateral trade. The truth is that few people really know what lies between Chinese rhetoric and Chinese policy.
One of the more extreme readings of this uncertainty comes from hawkish observers in Washington, who say a downturn in the Chinese economy could impact how it deals with Taiwan, the self-governing island that Beijing claims as its own territory.
Speaking earlier this month, Republican Congressman Mike Gallagher – chair of the US House Select Committee on China – said problems at home were making China’s leader Xi Jinping “less predictable” and could lead him to “do something very stupid” with regards to Taiwan.
The idea is that if, as Mr Rajah argues, it becomes apparent that China’s “economic miracle is over”, then the Communist Party’s reaction “could prove very consequential indeed”.
There are, however, plenty of people who dismiss this notion, including US President Joe Biden. When asked about this possibility, he said Mr Xi currently had his “hands full” dealing with the country’s economic problems.
“I don’t think it’s going to cause China to invade Taiwan – matter of fact the opposite. China probably doesn’t have the same capacity as it had before,” Mr Biden said.
Expect the unexpected
However, if there is one lesson to learn from history, it is to expect the unexpected. As Ms Elms points out, few people before 2008 anticipated that subprime mortgages in Las Vegas would send shockwaves through the global economy.
The echoes of 2008 have got some analysts worried about what is known as “financial contagion”. This includes the nightmare scenario of China’s property crisis leading to a full-blown collapse in the Chinese economy, triggering financial meltdown around the world.
Parallels with the subprime mortgage crisis – which saw the collapse of Wall Street investment giant Lehman Brothers and a global recession – are certainly tempting to make. But, according to Mr Magnus, they are not completely accurate.
“This is not going to be a Lehman-type shock,” he says. “China is unlikely to let their big banks go bust – and they have stronger balance sheets than the thousands of regional and community banks that went under in the US.”
Ms Elms agrees: “China’s property market is not linked to their financial infrastructure in the same way that American subprime mortgages were. Besides, China’s financial system is not dominant enough for there to be a direct global impact like we saw from the United States in 2008.”
“We are globally interconnected,” she says. “When you have one of the large engines of growth not functioning it affects the rest of us, and it often affects the rest of us in ways that weren’t anticipated.”
“It doesn’t mean I think we’re headed for a repeat of 2008, but the point is that what sometimes appear to be local, domestic concerns can have an effect on us all. Even in ways that we wouldn’t have imagined.”
— Reports /TrainViral/
The prospective new owner of Royal Mail has said he will not walk away from the requirement to deliver letters throughout the UK six days a week, as long as he is running the service.
“As long as I’m alive, I completely exclude this,” Czech billionaire Daniel Kretinsky told the BBC.
Mr Kretinsky has had a £3.6bn offer for Royal Mail accepted by its board.
Shareholders are expected to approve the deal in the coming months, but the government also has a say over whether it goes ahead.
Currently the Universal Service Obligation (USO) requires Royal Mail to deliver letters six days a week throughout the country for the same price. But questions have been raised over whether the service could be reduced in the future.
In an exclusive interview with the BBC, Mr Kretinsky also said he would be willing to share profits with employees, if given the go-ahead to buy the group.
However, he appeared to reject the idea of employees having a stake in Royal Mail, which unions have called for in exchange for their support.
The Royal Mail board agreed a £3.6bn takeover offer from Mr Kretinsky in May for the 500-year-old organisation, which employs more than 150,000 people. Including assumed debts, the offer is worth £5bn.
But because Royal Mail is a nationally important company, the government has the power to scrutinise and potentially block the deal.
As well as keeping the new government on side, Mr Kretinsky also faces the task of convincing postal unions that the proposed deal will benefit employees.
The USO is a potential sticking point for both the government and unions.
Royal Mail is required by law to deliver letters six days a week and parcels five days a week to every address in the UK for a fixed price.
How well this has actually been working in practice is a different matter. Ten years ago, 92% of first class post arrived on time. By the end of last year it was down to 74%, according to the regulator Ofcom.
Last year the regulator fined Royal Mail £5.6m for failing to meet its delivery targets.
Royal Mail has been pushing for this obligation to be watered down. It wants to cut second class letter deliveries to every other weekday, saying this will save £300m, and lead to “fewer than 1,000” voluntary redundancies.
‘Unconditional commitment’
Mr Kretinsky has committed in writing to honouring the USO, but only for five years.
And after that, in theory, the new owners could just walk away from it.
However, Mr Kretinsky told the BBC: “As long as I’m alive, I completely exclude this, and I’m sure that anybody that would be my successor would absolutely understand this.
“I say this as an absolutely clear, unconditional commitment: Royal Mail is going to be the provider of Universal Service Obligation in the UK, I would say forever, as long as the service is going to be needed, and as long as we are going to be around.”
Mr Kretinsky added that the written five-year commitment was “the longest commitment that has ever been offered in a situation like this”.
Another potential stumbling block for the deal, however, is how the company will be structured.
Unions would like to see the company renationalised, but Dave Ward, general secretary of the Communication Workers Union (CWU), told the BBC that would be “difficult in the current political and economic environment”.
Instead, what the CWU is pushing for is “a different model of ownership” – that is, where the employees part-own the business.
To get its support for the takeover, the union wants employees to share ownership of the company, along with other concessions including board representation for workers.
It says profit sharing is “not going to be enough to deliver our support and the support of the workforce”.
If the union doesn’t get what it wants, it won’t rule out industrial action, Mr Ward said. Its members went on strike in 2022 and 2023.
Although Mr Kretinsky said he is “very open” to profit sharing, he is not in favour of shared ownership.
“I don’t think the ownership stake is the right model,” he said. “The logic is: share of profit, yes, [but an] ownership structure creates a lot of complexity.
“For instance, what happens if the employee leaves? He has shares, he is leaving, he is not working for the company, he [still] needs remunerating.”
Mr Kretinsky said he didn’t want to create “some anonymous structure” but instead “remunerate the people who are working for the company, and creating value for the company”.
The union is also concerned about job losses and changes to the terms and conditions of postal workers’ contracts.
Mr Kretinsky has guaranteed no compulsory redundancies or changes in terms and conditions but only until 2025.
“If we are more successful, and we have more parcels to be delivered, we need not less people, but we need more people,” he said. “So really, job cuts are not part of our plan at all.”
He said if the management, union and employees work together, “we will be successful”.
Another concern is the potential break-up of the business.
The profit for Royal Mail’s parent company last year was entirely generated by its German and Canadian logistics and parcels business, GLS. Royal Mail itself made a loss.
Mr Kretinsky has promised not to split off GLS or load the parent company with excessive debt, although borrowings will rise if the deal goes through.
But he has a way to go to convince the CWU.
“I can’t think of any other country in the world that would just just hand over its entire postal service to an overseas equity investor,” Mr Ward of the CWU said.
However, Mr Kretinsky said that the postal unions “do understand that we are on the same ship, and that we need this ship to be successful, and that if we are there, we don’t have any real problems to deal with, because the sky is blue, and it’s blue for everybody.”
The union cannot stop this deal but the government can block it under the National Security and Investment Act.
Business Secretary Jonathan Reynolds has said he will scrutinise the assurances and guarantees given and called on Mr Kretinsky to work constructively with the unions.
Mr Kretinsky may say that he and the unions are ultimately on the same ship but, as things stand, they are not on the same page.
Who is Daniel Kretinsky?
Daniel Kretinsky started his career as a lawyer in his hometown of Brno, before moving to Prague.
He then made serious money in Central and Eastern European energy interests.
This includes Eustream, which transports Russian gas via pipelines that run through Ukraine, the Czech Republic and Slovakia.
He then diversified into other investments, including an almost 10% stake in UK supermarket chain Sainsbury’s and a 27% share in Premier League club West Ham United.
The Czech businessman is worth about £6bn, according to reports.
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