China’s President Xi went to Seattle at the start of his recent US visit, to meet the leading US internet companies. It was the clearest possible signal of his priorities for the future of China’s economy under his New Normal policies. He spent half a day on the Microsoft campus, and had a private dinner with Bill Gates, Microsoft’s founder.
The photo highlights the key importance of the visit. President Xi stands next to Satya Nadella (Microsoft), with Lu Wei (China’s internet regulator), Tim Cook (Apple), Ma Huateng (Tencent) and Jeff Bezos (Amazon). To Xi’s right stands Ginni Rometty (IBM), Jack Ma (Alibaba), John Chambers (Cisco), Liu Qiangdong (Liu) and Mark Zuckerberg (Facebook). In total, these business have a market value of $2.1tn.
Also noteworthy was that Xi did not visit Houston to talk to the major companies hoping to supply China with polyethylene and other products, as part of the planned 40% increase in US ethylene capacity. These expansions now risk becoming white elephants as China’s Old Normal economy suffers a major slowdown:
- The Old Normal economy was based on export-driven growth and infrastructure spending
- Its lasting legacy has been vast over-investment in real estate, chemicals and commodities
- In addition, it has created major pollution and facilitated widespread corruption
As state-owned China Daily confirmed over a year ago:
“A thorough cure means it could take a long time for the patient to feel better. Judging from the immense task China faces, it’s going to be another two years, at least, before change can be quantified in the central government’s statistical reports. Some assets, valuable just a few years ago, will become useless. The money that was spent on them, and their contribution to GDP, likewise will vanish. Those assets will include costly building projects in cities that never find a niche and industrial facilities unable to compete in the world….
If, as some business commentators propose, the country is to eliminate up to half of its industrial base to make way for business based on the mobile Internet, it will have to keep the credit line really tight for local development projects.”
Today, it is clear that this exactly describes Xi’s playbook. His aim is to instead build a New Normal services-based economy as highlighted by the South China Morning Post:
“This is more than just the internet, but more about how China can take advantage of new technology to transform its economic structure to rely less on exports and labor intensive sectors, which only mean small profit margins, and shift to more technology and knowledge-driven economic development”
The New Normal policy is already creating winners and losers amongst chemical companies and investors.
The winners are developing services-led businesses focused on China’s New Normal markets – such as those aimed at boosting living standards in the poverty-stricken rural areas, or for environmental clean-up. The losers will be those who cling to the hope that more stimulus is just around the corner, and that China’s Old Normal will somehow return.