China’s economic slowdown could pave the way for tech dominance

China’s economy plunged in the first half of 2022. But put into context, given its economic size, even a 5% expansion of its economy is almost equivalent to creating an economy the size of the Netherlands, or greater than that of the Netherlands. That of Turkey. A slower rate of growth on such a gigantic economic scale is inevitable.

As the gloom reigns, China’s economic engine has hit a brake, not a dead end, and there is still plenty of room for economic recovery.

At the latest economic rescue meeting of 10,000 attendees chaired by Premier Li Keqiang, he warned that “the current economic situation, at some levels, is worse than at the beginning of 2020 when Covid-19 struck fresh.” .

China faces declining exports and fragile consumption in 2022, exacerbated by the ongoing zero-Covid policy. Manufacturing capacity has been mostly disrupted by shutdowns and consumption growth has nearly stagnated, with millions of Chinese stuck at home.

But Li also noted that China has not flooded the market with liquidity during the pandemic and has therefore escaped the curse of inflation engulfing the West. China’s April consumer price index, a measure of the price of consumer goods and a marker of inflation, edged up 2.1% and China’s central bank has ample leeway to lower interest rates if the economy warrants it.

Trade, consumption and investment are commonly referred to as the “three horse-drawn carriages of the Chinese economy”. It’s no surprise that China’s impending economic rescue measures focus on the economy’s third and final horse. At the meeting, Li committed to an old-school Keynesian policy prescription: major investment in the country’s infrastructure.

In the more than 40 years since China began its reforms, its economy has repeatedly experienced downturns, including in 1990, 1998 following the Asian financial crisis and the global financial crisis. of 2008. Each time, China faced enormous domestic economic challenges. . And each time, China gave a new impetus of growth to the economy.

In the more than 40 years since China began its reforms, its economy has experienced slowdowns and each time it has fostered new growth.

In the first two decades of the 21st century, investing in rural transportation, highways, high-speed rail and airports has been a solid pillar of China’s economic growth, especially in difficult times. This time is no different.

However, China faces a new dilemma in 2022. The challenge for China today is less whether it should invest in infrastructure, but what infrastructure it should invest in that will best produce the economic results needed for tomorrow. . Not all types of infrastructure are created equal when measured by growth potential.

But today, China’s economic challenges go beyond simple structural reasons. It faces two formidable economic risks in 2022: the side effects of the persistent zero-Covid policy and the tighter control of the private sector for a year. Two sectors stand out as the main victims.

The real estate sector produces a fifth of China’s GDP. Real estate powers a wide range of industries, from commodities, construction and banking to real estate services. The real estate sector suffered from the government’s policy of recovering land sales and bank loans imposed by sale price ceilings and floors.

Since the surprising action taken against Chinese carpooling app Didi a day after its debut on the New York Stock Exchange, the country’s savviest entrepreneurs have responded quickly by shifting stock offerings to Hong Kong and focusing on their main activities. Antitrust regulations imposed on Chinese tech companies have prompted layoffs among China’s new tech elite class, which has thrived comfortably on lucrative stock options. More than $1 trillion in market capitalization of major Chinese tech companies has since dissipated on stock exchanges in the United States and Hong Kong.

What next? The solution to China’s growth clearly lies in technology – but think about infrastructure, not unicorns. The NDRC, the national economic planning body, has presented an ambitious national roadmap for data and computing power for the 2020s. The plan aims to transfer the wealth of data stored on servers on the east coast from China to the newly designed data computing centers in the western part of the country. Western China has so far lagged behind in its development momentum; this move will not only tap into the rich renewable energy capacity there, but will also give the region a unique and unmistakable strength in the digital age.

China has a clear focus on renewable energy infrastructure, budgeting nearly $10,000,000,000 to expand capacity – a bold move that will accelerate the renewable energy innovation cycle, reduce costs and cement an inalienable centrality in the global supply chain for energy transition. Over the next few decades, China is likely to be the largest producer of electric vehicles in the world, with significant domestic infrastructure spending on electric vehicles. It currently holds the largest global share in the solar and wind energy supply chains.

On the other hand, the US Build Back Better Act which provided for the delivery of renewable energy infrastructure, including 50,000 charging stations across the United States, was rejected by the Senate. As China and the United States realize the importance of investing in renewable energy infrastructure, China’s economic slowdown has provided the incentive to massively expand its own infrastructure as the United States lags behind. .

Over the decade, China will see its cloud computing capacity dramatically improved and its renewable energy market more affordable and accessible. A new economic model will emerge from this crisis, ironically making the current downturn worthwhile.

Posted: Jun 15, 2022, 2:00 PM

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