China has dominated global trade for decades now, selling its trashy trinkets and fake Chanel handbags to Western customers hungry for the cheap and cheerful.
Powered by cut-price labour and an abundance of energy, it became the world’s most industrious workhouse, extending its economic tentacles deep into every corner of the globe.
President Xi Jinping had the grandest of visions. The most vaulting example being the Belt and Road initiative, which aims to restore Marco Polo’s silk routes linking central Asia to the Middle East, up to the north of Europe, and down to Africa.
Behind that is Xi’s ambition to grow trade with countries along the routes, helping them finance roads and bridges in return.
It’s been a mixed success: across Africa Chinese workers are digging out tons of the earth’s rarest minerals to be used in the race to build electric cars.
Economic powerhouse: As the world’s most industrious workhouse, China has extended its economic tentacles deep into every corner of the globe
At the same time, China has gobbled up vast tracts of Africa’s most fertile land – twice the landmass of Germany – so grains can be exported back home to supplement their own harvests. Xi calls it trade. Others claim its economic colonialism.
Now the wheels are slipping off his great machine. Economic data suggests the Made in China era is petering out, or may be over.
Instead, the world’s second-biggest economy may be heading for a period of ‘lost decades’ akin to neighbouring Japan.
Consumption has fallen so sharply China is in deflation territory, the first of the G20 countries to report deflation since Japan two years ago.
The consumer prices index dropped by 0.3 per cent year-on-year, after no growth in June.
The long-hoped-for revival of the economy after the heavy-handed, authoritarian zero-Covid restrictions, which saw cities and factories shut down for months and people going without food, hasn’t happened.
Factory gate prices have crashed. Manufacturers are slashing prices, particularly for cars. Tax breaks worth billions to try to persuade consumers to buy electric cars don’t seem to have had much impact.
It’s no wonder there is no appetite to buy. The property market is in a mess, with many of the biggest developments being restructured after being piled high with debt. Wages have stagnated, the population is declining and unemployment is rising.
More than a fifth of the young are unemployed, a record high.
Earlier this week China reported weaker-than-expected trade figures. Exports, measured in US dollars, dropped for a third month in July, by 14.5 per cent compared to a year ago. Iron ore prices were sharply down.
Imports plunged by 12.4 per cent in July. On the export front, the sharp fall is because the rest of the world is also struggling.
With the West facing its own cost of living crisis, consumers are buying fewer trinkets or handbags. Or cars.
Heavy goods manufacturers and the construction industry are buying fewer components. The lower value of imports can be explained by the falls in commodity prices, which are declining after the huge rises seen since Russia’s war on Ukraine.
There are other factors at play. Once-eager foreign companies, which make up nearly a third of all exports, are pulling out.
Apple, Samsung and Siemens are moving operations elsewhere, partly because the strict lockdown demonstrated that supply chains should be more diverse.
Foreign direct investment numbers collapsed by 87 per cent to £4billion between April and June, the lowest for 15 years.
Inevitably, China’s deflation will pull the global economy in conflicting and competing directions. On one hand, it will help depress inflation because lower prices for imports will bring down our costs.
On the flip side, luxury brands such as Burberry are going to find it tougher to sell to China’s wealthiest if even they tighten their belts.
There will be a knock-on effect everywhere, particularly east Asia, Australia and New Zealand.
What now for Xi’s hope of replacing the US as the world’s premier economy?
Although China is still set to grow around 5 per cent this year, expect more rate cuts and measures to stimulate growth and avoid the deflationary cycle experienced by Japan. But it’s going to be tough to achieve.
Yet these latest problems perhaps explain why the new premier Li Qiang has been taking a more conciliatory approach towards the US and why Xi has been on the front foot in helping find a peace solution to the Ukraine-Russia war.
That would be no bad thing.
