Hong Kong is experiencing its biggest political protests in nearly 20 years. Tens of thousands of demonstrators have flooded the streets to demand true democracy, erecting barricades and threatening a riot.
While they may have picked the right issues to protest, they sure picked the wrong time to do it.
If it were any time before 2008, or between 2010 and 2012, then maybe they would have gained the sympathies of the international community. But not now.
It’s like a movie being released the same week as Lord of the Rings or Star Wars – they’re simply not getting an audience. At least, not by anyone willing to stick their own necks out to help them. Why?
Because the global economy is still in shambles.
China is still hurting from low international demand for its products, with its manufacturing output at multi-year lows. Europe is teetering on the edge of recession with undercapitalized banks, high fuel prices, and an approaching winter of freezing discontent as Russia’s threats to stop selling it oil and gas will likely be kept.
Though the U.S. economy may be slowly improving, its markets and corporations are anticipating a rocky adjustment to tighter monetary policy when interest rates begin rising next year.
Commentators have been speculating that any escalation of the Chinese government’s crack-down on Hong Kong protestors would incur the ire of the international community which would quickly punish China with sanctions over human rights abuses.
“An escalation of the protests could chill U.S. investment in China, further crimp China’s economic growth and ripple across the global economy,” anticipates USA Today. “An even more dire scenario could develop if China responded by sending troops to Hong Kong, provoking trade sanctions from other countries, Capital Economics said in a research note.”
But the cold, hard truth is that no one in the world can afford to let anything get in the way of their economic interaction with China – not even if China calls in its troops. Sanctions against China are simply never going to happen. China is still the second largest economy in the world, and almost everyone does business with it.
Let’s take a brief look at China’s importance in the global economy and why no one will ever stand up to it anymore.
China – A Nation of Factories
“Since the late 1970s China has moved from a closed, centrally planned system to a more market-oriented one that plays a major global role,” the CIA World Factbook introduces us to the new China. “In 2010 China became the world’s largest exporter.”
The changes were wholesale, reaching every part of the economy including the “phasing out of collectivized agriculture”, “gradual liberalization of prices”, “fiscal decentralization”, “development of stock markets and a modern banking system”, “opening to foreign trade and investment”, and “increased autonomy for state enterprises” – the latter one being of critical importance as the government was “explicitly looking to foster globally competitive industries”.
Did it work? You had better believe it. “China in 2013 stood as the second-largest economy in the world after the US,” Factbook reveals. “The dollar values of China’s agricultural and industrial output each exceed those of the US.”
China’s manufacturing sector has grown so rapidly that it now suffers from “industrial overcapacity” due to the “slow recovery of China’s trading partners”. As noted in the top left graph below, new orders for China’s goods had declined in 2013 and early 2014 to their lowest levels since the 2008-09 global recession, with exports at the bottom left marked by high volatility.
One interesting note on China’s exports as shown in the graph: the first quarter of every year sees a sharp drop, with a pick up from Q2 to Q4 – matching the western shopping pattern from post-Xmas to Xmas. The annual Q1 plunge in Chinese exports has grown more severe since the ‘08-‘09 global recession, and was the most severe in 2014. Exports have recovered as of late and should continue to increase into year’s end. However, they have topped-out since late 2012.
Source: TradingEconomics.com
With new orders slowed since 2010 and exports trending sideways since 2012, China’s industrial production has been declining since 2010, while its manufacturing production growth has been slowing since late 2013, as noted in the right-hand graphs above.
In an attempt to compensate for the loss of overseas consumption, the Chinese government is turning its own citizens “to increase domestic consumption in order to make the economy less dependent in the future on fixed investments, exports, and heavy industry”. The idea here is that Chinese factories could keep their smoke stacks spewing by supplying the domestic economy.
“However, China has made only marginal progress toward these rebalancing goals,” Factbook reports. Why? Because China has historically had a “high domestic savings rate and correspondingly low domestic consumption”. The Chinese are known as a nation of savers, not spenders, which is why investments in gold and silver have long been popular nationwide.
But progress is being made, slow though it may be. By 2013, some 36.3% of China’s GDP was centered on household consumption, its highest ratio ever. Coaxing more consumption out of its own citizens had helped a great deal in keeping China’s factories humming at an annual industrial production growth rate of 7.6% in 2013.
Unfortunately, not even the prying open of over 1.2 billion wallets could keep China’s industries expanding forever. By 2014, industrial output had slowed dramatically.
China Outgrows its Factories
Yet this slowdown in China’s industrial and manufacturing production is not as bad as it may seem, as the nation’s economy shifts yet again.
The first shift came in the 1970’s and 1980’s when it transitioned from being predominantly agricultural to predominantly industrial spliced with manufacturing. Now China is taking the next step forward as it shifts from being predominantly industrial to predominantly services-based. By 2013, agriculture contributed just 10% to China’s GDP, while industry accounted for 43.9% and services delivered 46.1%.
As noted in the graphs below, while China’s manufacturing PMI index has been averaging minimal expansion in the very low 50’s since 2011, the service PMI has been averaging a slightly faster expansion near 53 over the same period, while the non-manufacturing PMI has been averaging the greatest expansion at 55.
Source: TradingEconomics.com
This shift toward a predominance in services is extremely important, as it shows how China has officially crossed into a new stage of its development, which has a direct influence on the skills and education of its workforce – 33.6% of which is devoted to agriculture, 30.3% to industry, and a majority 36.1% to services.
China has come of age, and its people have too. Yet for the China’s government, this may prove to be just as much a curse as it is a blessing.
More Power to the People
The Chinese government’s desire all along has been to attain the same level of prosperity as that enjoyed in the west. But in making great strides to achieve that, the governing party may have achieved more than it bargained for. It has unwittingly empowered its people intellectually, materially, and politically.
This empowered populace may be something of a tinderbox of dry wood waiting for a spark to set it off. And that spark might soon be flying off of that little fire burning in Hong Kong. While most residents of Hong Kong have long been accustomed to the freedoms of speech and protest prior to the territory’s return to Chinese rule in 1997, mainland Chinese have not had as much experience with it. The 1989 Tiananmen Square protest was as close as they ever came to civil disobedience, which was quickly quelled by heavy-handed force.
But some 25 years have passed since then. The Chinese have grown in more than just material wealth, but also in knowledge and awareness of the world in which they live, and in their desire to be a part of it.
It would come a crushing disappointment to them were they to take-up the protests of their Hong Kong brethren and import that unrest onto the mainland, as they would find themselves alienated from the world they want so desperately to be a part of – for the world will not come to their aid.
Right at this moment there are corporate leaders and government heads from North America to Europe to Asia desperately doing everything they can to prevent another global recession, anxious for stronger economic ties with as many trade partners as they can dance with. And China is the most sought after economic partner everyone wants to dance with, not spar with.
Any fears that the Hong Kong protests will grow large enough to disrupt the Chinese and global recoveries are grossly unfounded. The Chinese government will never allow the protests to spread onto the mainland, and it will use force if it needs to. Its fortitude would be strengthened all the more by the knowledge that the rest of the world will do nothing about it. They just can’t afford to.
Joseph Cafariello
