China Decode: Inside China’s Economic Slowdown — and the Gig Workers Keeping It Moving

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1:49What we're seeing now is basically the biggest growth driver that China's had for around four decades is now falling off a cliff. And so that raises the fundamental question, is the China growth miracle over?

2:10Welcome to China Decode. I'm Alice Han. And I'm James King. In today's episode of China Decode, we're discussing China's economic slowdown and the wide-ranging impacts it could have on the global economy. Plus, as the UN Climate Change Conference, COP30, comes to a close, is China a climate saint or a climate sinner? We discuss. And lastly, what is it really like to be a gig worker in China? A former Beijing delivery man tells his story to an English-speaking audience for the first time. That's all coming up, but first, let's do a quick check-in with how the Chinese markets are starting the week.

2:46On Monday, the Shanghai A-Share Index continued to dip after ending last week down over 3%. The Hang Seng H-Share Index closed up 2%, erasing most of the losses from last week's sell-off. Alibaba rallied almost 5 % on news that its AI app, Quen, hit 10 million downloads just a week after its launch. And Baidu started the week up more than 4 % after JPMorgan Chase boosted the stock's rating. Now, James, we had the AI bubble issue coming to the fore in US markets. Certainly, NVIDIA's strong earnings make people feel a little bit less apprehensive about the AI bubble. But I don't think that the fears have completely attenuated.

3:26Some of that carried through to the Chinese mainland markets. But we've seen some recovery, I would say, amongst the big Chinese tech companies. What's your reading on this? I guess my reading is really what we said last episode, Alice. You know, the bubble in AI, such as it is, and to the extent that it exists, is effectively in the U.S. It's a bubble that's made in China. what's happening in simple terms is that the unbelievably low cost of developing these Chinese AI models and the low cost of operating the Chinese AI models is giving people in the US real pause for thought. They're wondering how their own models are so expensive.

4:08And then that leads them to the question of whether the US AI model is a bubble. So I would say, you know, the bubblicious element of this is in the US, not in China, or certainly not to the same extent in China. Yeah. But certainly China's price deflation, if you will, in the AI space, both in terms of the compute and the LLMs, it seems to be pushing some of these concerns about a bubble in the US. So the two, I think, markets are somewhat intertwined. But we'll get right into the first story. We begin this week with a story that's been, I think, building for the last few months in China since this summer.

4:46By many different measures, the economic health of China is in decline. Exports are down for the first time this year. Industrial output is weakening. Consumer demand hasn't been strong. And there are signs that inflation may finally be recovering and on the rise. Perhaps most troubling of all, I think, to my mind, is the overall decline in investment figures. Notable amongst these declines is the drop in the real estate investment. But also manufacturing investment is starting to look weaker. Fixed asset investment fell 1.7 % year on year from January to October. That includes a 14.7 % decline in real estate development investment and a 4.5 % drop in private sector investment.

5:29I mean, the numbers, to my mind, having studied the Chinese economy for over a decade, are pretty startling given that we started off on a good note in China, growth was 5.2 % year on year in the first half. A lot of that was driven by strong outperformance in the export sector. But what's been interesting to me is that ever since we started to hear about the anti-involution drive, I would say around about early July, there has been knock-on effects in terms of a weakened performance in the manufacturing sector, which since the real estate crackdown around 2021 has been one of the key drivers of the economy.

6:07So when I looked into the numbers the other day, if I looked at cumulative FAI from January to October, we've seen, I think, five consecutive months of declining fixed asset investment. And that has been some of the weakest performance in terms of monthly declines since COVID. And again, as I mentioned at the top of this segment, it's really the real estate investment that since 2021 has been a key drag to the economy and to fixed asset investment. In fact, the October numbers looked worse than any that I'd seen since 2021 when you really saw the crackdown take place. And then similarly, infrastructure investment down 0.1 % cumulatively in October.

6:46The real surprise for a lot of us watching this was the manufacturing investment figures, which were not negative, but certainly grew at a weakened pace at 2.7 % year on year from January to October. And that has been on a decelerating trend since July. The upside, I think, and again, I want to throw this to you very soon, James, the upside is that we're starting to see mild signs of a reflation in the economy. CPI rose 0.2 % year on year in October from negative 0.3 % year on year in September. PPI deflation is starting to reverse, suggesting that we're seeing some bottoming out in the industrial deflation story.

7:26And I would say that, generally speaking, when I look at the economy, I think they're taking signs in a more positive direction in terms of rebalancing the economy away from purely being driven by manufacturing investment-led growth. But I know there's a lot, James, to cover. This is kind of my bread and butter, but I want to hear what you have to think about this. I mean, yeah, I think that we're at a very important point in China's development. I mean, we're at one of the most important points that we've seen for the last 40 years or 40 or more years since China began its reform and opening up to the rest of the world.

8:03It really is that important. And let me just try to explain why. The main thing, as you've said, Alice, is that fixed asset investment. Now, this is everything. This is everything that's invested in infrastructure, in real estate, in machinery, in factories, equipment, everything. China's economy has been driven by fixed asset investment for pretty much all of the last 40 years. And then in October, we saw the biggest ever monthly fall in fixed asset investment. As you said, it was down 12.2 % on a year-on-year basis. So what we're seeing now is basically the biggest growth driver that China's had for around four decades is now falling off a cliff.

8:52And so that raises the fundamental question, is the China growth miracle over? And if it is, then of course, that has huge implications for the outside world because China has accounted for around 31, 32 % of global GDP growth between 2015 and 2024. So just to put that in perspective, the US accounts for about 9.4 % over the same period. So China is by far and away the biggest contributor to global economic growth. So, you know, the questions really couldn't be any bigger. The biggest motivator of Chinese growth has just fallen off a cliff. China is the biggest contributor to global growth. Does this mean that the global economy is headed for the buffers?

9:43That, I think, is the question. And I think the answer, just to give my sort of top-line answer, I think the answer is no. I think what we're seeing now is not a collapse in the Chinese economy, but a reordering of the Chinese growth model. And you've already mentioned some elements of this. But for instance, if we look at what's happening in manufacturing, you mentioned that manufacturing investments, so this is all of the money that's going into building factories and putting machinery in those factories and all of that, we've seen that that is declining sharply. But the reason for that is the key thing.

10:25The reason seems to be that companies all over China are answering the call of Beijing to do this anti-involution. And I check back, we had an episode about a month ago in which we went into all of the ins and outs of involution. What does it mean? What it means is really stripping out overcapacity in many of China's industries. And so that apparently is what is happening now. Overcapacity is being stripped out, and that means that the investment in manufacturing goes down. I think what happens next is that we see even bigger, even stronger Chinese companies emerging because, you know, they can sell better into the Chinese economy.

11:09There's less oversupply. Their profit margins start to increase rather than the economy starts to collapse. So anyway, that's a rather long answer. But my strong sense of this is that this does not spell China's economic crisis. This is a signal that China is making progress in reordering its economy from a vastly bloated, overcapacity-ridden economy with a manufacturing sector in which profit margins are wafer thin because everybody's competing for every nickel and dime into a more streamlined, more profitable economy. I don't know. Do you have the same sense of this, or are you more worried than me?

11:50Well, I definitely am not in the full bare case that this is a sign of portending doom or a crash in the Chinese economy. I am more in the camp, I think, of quite skeptic because the way that I see the Chinese economy anytime it talks about rebalancing is that it's a cha-cha. Rebalancing is a charter because it's one step forward and two steps back. And I think ultimately, because growth has been so strong this year, and because deflation has been, I think, one of the top two issues in the economy, they've had the firepower policy-wise to go forward on this anti-involution campaign. And that has led to the central government putting pressure on the local governments to cut back on capacity, to slow roll and delay on plan approvals across a number of sectors.

12:37That, I think, has weighed down quite significantly on manufacturing investment. And then similarly to this, we haven't mentioned yet, infrastructure investment historically has also been a key driver of fixed asset investment and thereby the economy. What we have seen is that instead of the bond issuance, which the central government allocates to the local governments every year, being used for infrastructure investment, it's increasingly being used to pay down debt levels. We see a lot of local governments that have been heavily burdened not only by COVID scarring, but also the real estate crackdown hitting their revenues, needing to use that bond issuance effectively to pay back some of their debts.

13:15So I think that those two elements combined are seriously adding to the stress on the fixed asset investment front. And the reason fixed asset investment, I can't overstate it, is so important to China is that China historically is so imbalanced. I mean, listeners will appreciate this. The consumption share of GDP globally on average is around 74, 75 percent. Investment is 24 to 26 percent of GDP. China, by contrast, the consumption accounts for 53 percent of GDP. Investment accounts for 43 percent of GDP. And net exports makes up the rest at around 4 percent of GDP. So that goes to show you how, unlike most other economies like the US and the West, China is still heavily reliant on fixed asset investment, which is why, to answer your question, James, I think that this rebalancing will be somewhat short-lived.

14:05because when we get into 2026 and we start to get, say, another 5 % GDP target or thereabouts, they're going to have to do a lot more fixed asset investment to make up that growth target. Because if I look at the numbers on consumption, even although they're not terrible, 2.9 % year-on-year in October, that's still not robust. And I think if we look at some of the signs in the data for households' propensity to consume, I don't see any real positive signals that households are immediately going to start to consume more and really boost the economy through consumption. One last thing that I'll say is that the services consumption has started to look a bit stronger.

14:47But again, I think as long as China is wedded to these targets for annual growth, they will continue to rely on fixed asset investment as a key driver. So for now, I see it as a mini rebalancing, but I think it's going to be short lived. That's really interesting. I mean, I think we're going to have to see what happens. As you say, there are basically three big contributors to Chinese GDP. One of them is the investment, so-called fixed asset investment. The other is consumer spending, which you've just mentioned. And the other is exports. We've all seen China's export performance this year has been just unbelievably robust.

15:26And China's heading for an unprecedentedly large trade surplus of more than a trillion US dollars. I'm pretty sure that no country in human history has ever had a trade surplus of a trillion US dollars in a single year. So, you know, I think there are two takeaways from this. One, it shows how much China depends on these exports, and therefore how little China is sympathetic to countries around the world that are finding the inflows of Chinese goods sort of almost unbearable, you know, China just can't alter course because its fixed asset investment contributor to gross domestic product is falling away, as we've just discussed.

16:07And as you've just mentioned, Alice, the consumer spending aspect or contributor to China's gross domestic product is kind of a little bit underwhelming. And I think that gives the reason why exports are so crucial for China and why China is so dead set on driving its exports into markets all over the world. The one area I think I might disagree with you on a little bit is not consumer spending overall, which, as I agree, is a little bit underwhelming, but the services sector in China. Services form a part of consumer spending. And that, I think, is really going quite strongly. You know, people are spending much more money on experiences.

16:50They want to enjoy their lives, their internal tourism, external tourism, going to the cinema, having fun. You know, that seems to be an area that is fairly strong in China. But I don't know. We need to follow this. I'm calling a reordering of the China economic model, not a Chinese economic collapse or a crisis. But we'll see how it turns out. Yeah, definitely. Watch this space. Okay, we'll be back with more after a quick break, so stay with us.

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19:45Welcome back. Last week in Brazil, the United Nations held their 30th global climate change conference, COP30. And one of the largest themes in the reporting this year has been the decline of the leadership and influence of the United States. Now, the Trump administration has shown animosity toward global climate cooperation with the White House spokesperson commenting over the weekend that, quote, President Trump will not jeopardize our country's economic and national security to pursue vague climate goals that are killing other countries. So the big question is, in the wake of the U.S.'s climate retreat, will China pick up the slack and become a new global climate leader?

20:24On the one hand, China has made dramatic improvements to combating air pollution. They are now exporting clean technology around the world and are a leader in electric vehicle production. But on the other hand, China is also still the global leader in coal consumption and still the world's largest greenhouse gas emitter by orders of magnitude. This is, I think, a very topical issue now that we have the United Nations meeting for that global climate change conference COP30. There certainly is a lot of debate and uncertainty. I think the general consensus view is that China can meet one of its dual carbon mandates, the 2030 mandate of peaking emissions.

21:03I think it's well beyond being on track. In fact, it's probably surpassing that target. And the other target, which I think people are more skeptical about, is the 2060 carbon neutrality target. Xi Jinping, I think, announced several years ago that he wanted the Chinese economy and the Chinese people to reach these two carbon targets. But on the other side, it's hard to contest that China is importing more coal, especially from my country, Australia, and emitting more of these fossil fuels in order to fund these electricity developments, whether it's in data centers or even in producing batteries and solar panels and electric vehicles.

21:41So the irony is that it's emitting more carbon in order to produce a lot of these clean energy technologies. And on the other hand, it shouldn't be understated. China is deeply concerned about energy security. The problem with a lot of these renewable energy sources like solar and wind is that they're not exceptionally reliable. And so historically, they've had to rely on some of these fossil fuels like coal to make up the rest. So it's hard for me to see how China pivots. I haven't got a sense, for instance, that the carbon emissions trading scheme has been a success. A lot of the quite pollutive industries are not covered by that ETS scheme.

22:21So I'm somewhat in the skeptic camp, even although China is producing a lot of the clean energy technologies, is ironically using a lot of fossil fuels to do that. But James, maybe you wildly disagree with me. I mean, you know, I sort of think that there's a big dichotomy going on here because China is at the same time the world's biggest climate saint and the world's biggest climate sinner. You know, I think that obviously China is the biggest emitter, but China is also the biggest deployer of renewable energy, in other words, kind of clean, green energy. And so the world just has to get used to this sort of dual role that China has.

23:04Some people want to look on the saint side, other people want to look on the sinner side. But if I had to sort of make a call on this, I would say that the Saint quotient is developing quicker than the Sinner quotient. In other words, China's deployment of renewable energy is cutting down its carbon emissions fairly quickly. And if we look at some of the details of China's deployment of this renewable energy, it really is quite stunning. For instance, China's deployment of wind power is 2.2 times that of America, and its deployment of solar power is 2.8 times that of America. And much more important than that, because it forms a structural reason to invest in both wind and solar energy in China, is the cost of generating.

24:01And here, what we have is the average price of producing electricity in China is US$88 per megawatt hour. And in the US, it costs US$188 per megawatt hour. So you can see that the technology that China is using to generate electricity, particularly in the areas of wind and solar, is so much cheaper. I just want to give another quick fact on this. Some of the latest solar panels that are being produced in China by Chinese companies produce the cheapest electricity in the world anywhere, and they cost about two US cents per kilowatt hour. Now, that is about one-fifth of the cost of producing electricity from coal in a country such as the US or the UK.

24:52So the reason why China is becoming more and more of a climate saint is because it's making technology to generate power at far cheaper rates than any other country in the world can manage. But at the same time, James, how do you read the fact that they are importing and using even more coal? I mean, I was looking at the numbers the other day. Fossil fuel power generation rose 7.3 % year on year in October. And a lot of that is powered by coal and some by natural gas. The electricity demand is only ever going to go up. I think the AI computer is probably going to push that up further, I expect.

25:32So how do you square the two? I find that very puzzling. Now, if we break down the energy composition, and you already alluded to it, I mean, China's coal energy production is 9x the US's. Hydropower and wind and solar are still considerably larger than the US, but I bet that coal number is huge. Nuclear is still trailing behind the US. Now, they could go the nuclear path, which I think that they will increase in terms of the share of total energy. But certainly, they rely a lot more on coal. And the US relies a lot more on, say, gas, for instance, where it leads at 6.2 times the amount China produces.

26:09But I find that difficult to understand, especially in a period in which I expect electricity generation to only go upwards. Yeah, absolutely. You're so right to mention that. I remember in China going to some coal towns which are so polluted with coal dust that you can barely see sort of 20 meters in front of the taxi as you drive through town. There's a sort of yellow haze that hangs over the city, rather like Dickensian London. You know, it really is. It really is extraordinary. And so, you know, it does raise this urgent question of why. Why, if you've got solar panels that can generate electricity much more cheaply than coal, why are you still polluting the atmosphere, mining coal, you know, going through all the danger that mining coal requires?