China is not in recession, but growth in 2022 is expected to be just 3%, well below average than expected. This is something close to the contribution of urbanization to the growth of the country, where 500 million people live in the countryside and productivity triples the moment they move to the city (or the city comes to them, through urbanization of rural areas).
Unlike the rest of the world, where interest rates continue to rise to contain inflation, the People’s Bank (the Chinese central bank) cut interest rates this week. The construction sector is in crisis, banks are restricting loans and thousands of people are collectively defaulting on real estate companies.
Still, there are no risks to the world economy. Chinese growth is always asymmetrical; even in times of high growth, local problems were common.
What is new is that the slowdown is something that the authorities do not intend to avoid, for two reasons:
The first is the concern with the zero covid policy.
The second, more relevant, is the deleveraging by rebalancing the economy, from manufacturing to services, in some parts of the country.
While in the past, as in 2009 and 2015, Chinese authorities reacted to signs of crisis with robust economic packages, since 2020 there has been caution in helping struggling companies, whether public or private.
And that, even in a politically relevant year, when President Xi Jinping is due to be reappointed for a third term.
What explains this caution? The recognition that China’s growth engines will be different and therefore the solutions cannot be the same as in the past. It is common for analysts to compare Chinese debt indicators with the rest of the world and conclude that they are too high.
For example, China’s total public and private debt, in relation to GDP, is expected to end the year at 275% (in Brazil it is around 160% of GDP). But the normal thing is that in countries that grow very fast, the debt indicators grow much more than the GDP, for a long time.
While heavily industrialized, China grew by more than 10% a year, and even before the pandemic, 6% growth was expected. But it is now clear that cities like Shanghai and Beijing are rapidly de-industrializing. And there is no more room in them for the unbridled residential and commercial growth of yore. The construction sector, which accounts for about 11% of GDP, is now concentrated in other cities in lesser-known provinces such as Ningxia, Shanxi and Jiangxi.
New frontiers for economic development present new challenges. To hold on to private debt, including developers, the government is monitoring, but without much assistance, a landing of the sector (and the rest of the economy), as the growth model in big cities is moving towards the sector of services.
While parts of the country are still making the leap into middle income, there is no need to worry about letting marginally profitable companies fight for survival. It is, in a way, the “creative destruction” propagated by Schumpeter, the famous economist of the early 20th century.
The authorities may change their minds if there is too much destruction and too little creativity. But until then, China will not be the world’s great engine; but just for now.
I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
