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China is preparing for a potential escalation of conflict with the USA by heavily investing in its energy and technological independence

POLITICSChina is preparing for a potential escalation of conflict with the USA by heavily investing in its energy and technological independence

The latest economic data from China has surpassed forecasts. While some analysts expect a return to optimism and an improvement in sentiments, the Chinese economy is facing long-term challenges such as a demographic crisis and a slump in the real estate sector. Chinese authorities have already redefined their priorities, now focusing more on economic security rather than purely on economic growth. “China is preparing for an escalation of the conflict with the USA, and it is in this light that the Chinese economy should be observed,” notes Maciej Kalwasiński from the Centre for Eastern Studies. He points out that China is heavily investing in the development of its industry and energy independence to reduce dependence on foreign sources.

In the first quarter of this year, China’s GDP grew by 5.3% year-over-year (compared to 5.2% year-over-year in the last quarter of the previous year). The market consensus was a growth of 4.6% year-over-year. On a quarter-to-quarter basis, the Chinese economy expanded by 1.6% (after growing by 1.4% in the last quarter of the previous year), outpacing market forecasts which expected growth of about 1%.

“The latest macroeconomic data indicate that the Chinese economy is accelerating after a period of disappointing recovery. We expect that in the coming months, on the wave of positive news, sentiments will improve and the Chinese economy will continue to accelerate. However, the dynamics of economic growth in China should also be viewed in the long term, and from this perspective, we have observed for several years that this economic growth is slowing down,” Maciej Kalwasiński, an analyst from the Chinese team at the Centre for Eastern Studies, explains in an interview with Newseria Business.

Analysts note that in March, Chinese industrial production unexpectedly slowed down to 4.5% year-over-year (compared to 7% in February) against an expected 6%, and retail sales also decelerated to 3.1% year-over-year (compared to 5.5% in February), with analysts expecting a growth of 4.6%. This casts doubts on the durability of the Chinese economic recovery, which is facing structural challenges, particularly a crisis in the real estate sector. Some experts predict a slowdown in the second half of this year, and the median forecast for China’s GDP in 2024 collected by Bloomberg anticipates growth of 4.7% year-over-year. Meanwhile, Beijing has set an economic growth target for this year at about 5%.

“Currently, enhancing economic security, not stimulating economic growth, is of key importance for Xi Jinping and his team. China is preparing for an escalation of the conflict with the USA, and it is from this perspective that the Chinese economy should be observed,” the expert emphasizes.

As Maciej Kalwasiński points out in his analysis “Security More Important Than Growth: The Chinese Economy on the Threshold of 2024,” Chinese leader Xi Jinping has redefined the priorities of Chinese economic policy. The main goal of Beijing is now to strengthen security and reduce the state’s dependency on foreign influences. The authorities are not focusing efforts on stimulating economic activity but on striving for self-sufficiency in critical areas such as technology, energy, and food production.

“Additionally, which is a secondary goal, they want to increase foreign dependence on China to have a greater tool of pressure on foreign partners in case a significant escalation of the conflict with the United States occurs. As a result, China is heavily investing in the development of industry and energy infrastructure based on domestic energy sources, such as solar and wind power, and of course, they are also expanding nuclear power plants, while not abandoning investments in coal energy. This is an important observation because one could say that in terms of ambitions for the development of green energy, China is currently in first place globally, investing the most in the development of green energy, and at the same time, it is also investing the most in expanding coal capacities. One can conclude that the main goal of China is to reduce dependency on foreign sources and prepare for the potential need to use its own domestic energy sources in a conflict situation,” assesses the OSW analyst.

From the data cited in the analysis, it appears that in 2023, China’s investments in the production of machinery and electrical equipment rose by over 32%, in the generation and supply of electricity and thermal energy by over 27%, and in the automotive sector by nearly 20%. Much of this production is exported. Last year, China was the global leader in car exports, and its manufacturer BYD became the global leader in electric vehicle sales in the fourth quarter. Additionally, Chinese companies are strengthening their position in the global supply chain for solar panels, controlling 80% of this market. Their exports are growing at a rate of several dozen percent annually.

In 2023, the United States’ lead over China in the ranking of the world’s largest economies grew to the highest level since 2008. The US GDP was about

$9.5 trillion larger than China’s. However, China remains the largest industrial power in the world at this time, accounting for about 30% of the global value added in the manufacturing industry (for comparison, the US share is about 11%). This, of course, has implications for the economies of other countries that rely on supplies of many industrial, investment, and consumer goods from China. Any serious disruption in the flow of these goods, which would be a consequence of an escalation of the conflict between China and the USA, would have immense negative effects on supply chains in other parts of the world.

“We are talking about the two largest economies in the world, the largest exporter – China, and the largest importer – the United States. And we are talking about a situation that could sever the connection between these economies and simultaneously force other countries to choose sides. That’s why many countries are currently making intense efforts to increase security, including economic security, develop their own domestic production capabilities, and at the same time reduce dependency on other partners,” says Maciej Kalwasiński.

Potential escalation of the conflict would also affect financial markets.

“This will translate into valuations of assets such as stocks, currencies, commodities. The Polish currency is not considered particularly safe, so one can expect that in the event of an escalation of the conflict, the złoty would weaken significantly. We can also expect an outflow of funds from stock markets, so the valuations of listed companies will fall, and this in turn will also affect our wealth. Finally, we can expect that – if the situation were really serious – we would see sudden behaviors by the public, which of course also has an impact on the economy. There will be growing concern about the availability of goods, such as fuels and electronic goods, as a result, people will react and prepare for further escalation of the conflict to a critical level,” assesses the OSW analyst.

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