China's dependence on high-tech exports narrows policy space

[Beijing Current Affairs] China's real GDP (gross domestic product) for the July-September period increased by 4.5% compared to the same period last year, a slight increase from the 4.3% increase in the previous period. Expanding global demand for artificial intelligence (AI) has pushed exports to an all-time high, making it clear that weak domestic demand will be compensated for by external demand. However, headwinds from trade friction are increasing, and there are doubts about the sustainability of growth.

The cumulative increase from January to September was 4.6%, and although we are close to achieving the lower limit of the government's ``4.5% to 5.0%'' target for the year, we cannot be optimistic. While the high-tech manufacturing industry performed well, increasing by 14.3%, the decline in real estate development investment, which continues to be sluggish, fell by 20.6%.

There is limited room for economic stimulus measures. According to the National Financial Development Laboratory, a government-affiliated think tank, the outstanding debt of the government, businesses, and households has exceeded three times the GDP. The government is cautious about large-scale economic stimulus measures, partly due to concerns about debt ballooning. With interest rates rising in the United States and Europe, significant interest rate cuts could widen interest rate differentials and lead to capital outflows, putting constraints on monetary easing.

Dark clouds also hang over the future of exports. Chinese products that have been shut out by high U.S. tariffs are flowing into third countries, and 15 countries and regions, including Japan, the United States, and Europe, signed a statement this month to combat overproduction. Concerns about the bursting of an investment bubble have been reignited due to concerns about the credibility of U.S. AI-related companies, and China's high-tech economy is in danger. Under these circumstances, the International Monetary Fund (IMF) predicts that China's growth rate will stall from 4.5% this year to 4.0% next year.

China's slowdown could have ripple effects on the global economy. The IMF estimates that a 1 percentage point drop in China's growth rate would reduce the growth rate of its major trading partners by up to 0.3 percentage points. Director-General for Asia and the Pacific Srinivasan called for a "break away from dependence on exports" and "massive fiscal stimulus." The Chinese government faces a dilemma between growth and fiscal discipline.