China’s economic plight and its impact on the world

In 2008, China’s rapidly expanding economy and a massive stimulus package launched by Beijing helped Western countries recover from the global financial crisis.

At a time when high inflation, exacerbated by the Ukrainian War, holds back the growth of major global economies, many economists are hopeful that the Asian power will again come to the rescue of the world.

But it’s not 2008: China’s economic woes are deep, the government has practically given up on its annual target of 5.5% GDP growth. In July, Prime Minister Li Keqiang warned that there is little appetite for expansionary measures.

Business and consumption in the second-largest economy have been stifled by the national Covid zero policy, resulting in months of lockdown in dozens of cities and forcing numerous firms to close. Now Chinese leaders are reluctant to reverse the draconian decisions, fearing it will trigger a bigger crisis.

“China has not, in fact, lived with Covid-19, like the rest of the world. So, there would be economic chaos if the virus suddenly hit the country”, explains Jacob Gunter, chief analyst at the Mercator Institute for Studies. Chinese (Merics), based in Berlin. “There is no acquired immunity, due to the refusal to import mRNA vaccines; there is no developed healthcare system; and a lot of hesitation about the vaccine.”

Real estate crash worse than ‘Covid zero’ policy

Worse still, the government’s recent scrutiny of property developers’ debts triggered an industry meltdown that pushed one of the country’s biggest homebuilders, Evergrande, to the brink of bankruptcy.

Homebuyers have suspended mortgage payments on unfinished apartments, bank loans for property purchases have dropped for the first time in a decade, and the volume of residential space — a gauge for new construction activity — has nearly halved in the second quarter. of 2022.

Compared to Covid zero policy, “the housing crash is the biggest problem,” in the opinion of Craig Botham, a China expert at research consultancy Pantheon Macroeconomics. “The economy has shown itself capable of recovering quickly from lockdowns, but the damage of the devaluation of assets in a sector equivalent to 30% of GDP is much more pernicious. Families, banks and local governments all have their balance sheets damaged.”

While refusing to dole out further monetary stimulus until inflation and the Covid-19 pandemic are under control, in mid-August the Chinese central bank cut interest rates, in reaction to below-than-expected growth in industrial production and retail trade. forecast, and the 10% reduction in oil demand in the previous month.

“It’s the opposite of what is happening in the rest of the world, where countries are raising interest rates”, comments Gunter. “China has the opposite of the problems we have in the United States and Europe”, he adds: consumers in the country avoid spending for fear of being quarantined, without a source of income.

In the end, will China help the world?

However, Craig Botham does not believe that the rate cuts will make much of a difference to China’s economic growth, for two reasons: “One is that they will only immediately impact banks’ funding costs, without necessarily being passed on to the real economy.”

“The second, and more important, is that demand for loans has plummeted downhill. I suspect the People’s Bank of China felt it had to do something, even though it knows that whatever it does will have minimal impact.”

While holding back any new stimulus, the central government tried to divert attention away from itself, urging regional governments to do more to stabilize growth and encourage employment opportunities — a move that was met with skepticism, reports Botham: “Governments locals have balance sheets full of holes, and there’s not much else they can do. We need to see the central government take action.”

Pressure is already building on Chinese leaders: in mid-August the state-funded Financial News called for pro-growth measures. Quoting Wen Bin, chief economist at China Minsheng Bank, the front-page report urged Beijing to stimulate demand through subsidies. In addition, he defended the adoption of more measures for the industry and the real estate market, aiming at boosting the recovery of production and consumption.

Resistance to new subsidies could ease in the coming months as President Xi Jinping prepares to run for a third term at the 20th National Congress of the Communist Party of China, scheduled for November.

Unlike 2008, when Chinese stimulus of 4 trillion yuan helped to stabilize the global economy, any expansionary measures by Beijing are likely to have limited impact for the West, assesses Craig Botham. However, it could help mitigate the cost-of-living crisis that oppresses the region.

“It is safe to say that China will not bail out the global economy this cycle. Hopes of a new raw materials supercycle launched by China will be dashed. However, the focus on supply-oriented policies and weak Chinese demand will result in for China to export disinflation or even deflation to the rest of the world over the next 12 months, keeping global inflation in check.”