World economy may feel effects of Chinese slowdown

The Economist magazine recently pointed out that China, over the past 20 years, has been “the biggest and most reliable source of growth in the world economy.” It contributed a quarter of the rise in global GDP over that period and expanded in 79 of the 80 quarters.

These impressive numbers reflect the impact of opening the Chinese economy after Mao’s death to a mix of market reforms and state control. But it appears that the Chinese economy is in some danger. There are two major causes. The first is the “zerocovid” strategy which has caused a slump in the economy and may condemn the economy to a stop-and-start pattern for the foreseeable future.

At the same time President Xi is struggling to remake state capitalism. If it stays on this path, China’s growth will slow and become less predictable, with substantial consequences for both China and the world at large.

The zero-covid policy has witnessed continual outbreaks in major centres, including the nation’s capital Beijing. With more than 200 million people living under lockdown restrictions, retail sales have tanked and industrial output and exports have dipped as well.

More than 100 million Chinese citizens over the age of 60 are not tripled vaccinated and the vaccine being used is much less reliable than the MRNA vaccines developed and used in the West.

Since Xi is the author of the zero-covid policy, any overt criticism would be regarded as sabotage. So, change is unlikely, at least until the planned 20th congress of the Communist Party this fall when Xi is expected to gain an unprecedented third term as president.

Xi has implemented what he calls his “new development concept.” The goals are both simple and rational: to stamp out inequality, monopolies and debt while ensuring China dominates new technologies and is fortified against potential Western sanctions.

The implementation of this policy change has, however, been both punitive and erratic. An avalanche of new regulations, fines and purges has caused the tech industry, which accounts for 8% of the GDP, to stagnate. A similar treatment of the property sector, responsible for over 25% of GDP, caused it to suffer a funding squeeze with housing sales declining by 47% year over year.

There is a credible rumour that a massive public works program will be put into place to allow the economy to reach the targeted 5.5% growth for 2022. The problem with such a program is that it focuses on the least productive part of the economy, the government-run sector.

Unfortunately, the most productive part, the private sector, has been damaged by the government’s fiscal actions. Capital outflows have been substantial. The cost of capital has risen. Chinese shares have declined compared to American shares.

Investors, once enthusiastic, are changing their attitudes towards China. Some fear that gains, if any, will be capped by the party because it is distrustful of private wealth. For the first time in over 40 years, no major sector of the economy is undergoing liberalizing reforms. Without the continuation of such reforms, growth will suffer.

A slowdown in China’s growth while the rest of the global economy is contemplating a possible recession would be a major problem.

Multi-national firms will start to rebalance supply chains away from China, as Apple is currently doing.

As the West becomes more concerned about the business climate in China and less supportive of Chinese policies in third markets, it will be left to China’s bureaucrats to promote Chinese economic projects. Consequently, these projects will be less likely to be effective.

Finally, China’s having supported the Russian invasion of Ukraine has not helped, particularly in its relations with smaller Asian nations who are beginning to fear similar encroachments.

The next two years will really test the ability of the Chinese government and the Communist Party that controls it to deal effectively with the problems they face. One thing Chinese citizens might wish to bear in mind is that dictatorships seldom have the flexibility to make quick changes if they make mistakes.