The four big threats to China’s economy | Ezine Daddy

William Rhodes and Stuart Mackintosh have identified four distinct but overlapping economic risks to China.

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The following comment was written by William R. Rhodes, CEO of William R. Rhodes Global Advisors, former Chairman and CEO of Citibank and author of “Banker for the World: Leadership Lessons from the Frontlines of Global Finance“; and by Stuart Mackintosh, executive director of non-profit organization The Group of Thirty.

We should all be concerned about what is happening in China because it will affect us all.

Economic threats and Chinese President Xi Jinping’s response to them will affect China first – but problems in China could create problems everywhere this year and next.

The world is rightly focused on the atrocities committed by Russia in Ukraine, and China’s decision to side with Russia is straining the links of globalization.

But China’s economic challenges go beyond the war. Threats to China’s prospects are mounting in four distinct but overlapping areas: home, healthcare, debt and a fracturing world.

property

China’s leaders must ask themselves whether their political support for a declining, weak, and unpredictable Russia is worth more to China than an interconnected world in which all competitors agree on common rules and norms.

A stumble in real estate does not bode well for the economy as a whole. Economists have shown that most recessions are related to either stock busts or housing busts. Once house prices falter and start falling, we know the impact of debt on house price declines: the former amplifies the latter and can lead to a collapse in broader consumption. Underwater homeowners stop spending when their home prices fall.

China is not yet at that dangerous point. But the omens are ominous. We would be naïve to think that normal economic boom-bust rules will never apply in China, or that Chinese authorities can effectively control prices across the country at all times and indefinitely. Still, we have to hope they can manage housing better than the West did in 2007-2008.

“Zero Covid”

As China’s housing markets tremble, the impact of pandemic policies is worsening the economic situation.

China’s zero-Covid policy, by far the toughest medical and public health response to the pandemic ever, is in trouble. China’s rigid stance on prevention paid off – the country continued to operate largely virus-free in 2020 and 2021.

However, now that the virus is mutating and spreading rapidly, these measures can be more costly. A surge in cases in Shanghai to about 20,000 a day last week led to the city’s shutdown, sparking citizen anger and the quarantine of 26 million residents. Shanghai alone contributes 4% to China’s gross domestic product and is its largest port.

Lockdowns are being imposed in cities across China. The negative economic effects of the difficult to maintain Covid policy will become visible in the coming months. Economists are already cutting growth forecasts for the country.

If demand in China weakens, everyone outside the country could feel it too. It is unclear whether the central government is willing or able to shift from zero tolerance to a new approach – although such a shift seems increasingly necessary to outsiders.

Risky external loans

Interest rates are rising as developed countries try to contain inflation. Much of the lending made by Chinese companies under Beijing’s Belt and Road Initiative will not only weigh on balance sheets in low-income countries around the world, but will also burden China’s banks with non-performing loans. This, in turn, will affect the economic performance of these banks, which are important channels for Chinese domestic investment, business and the economy.

According to a 2021 report by AidData, an international development research laboratory based at the College of William and Mary in Virginia, the “Belt and Road” has left developing countries with at least $385 billion in debt.

There, China faces three negative dynamics: debt defaults, bad loans on the books of its largest banks and sovereign lenders, and collateral damage to diplomatic and geopolitical interests as it seizes nations’ assets as part of sometimes onerous credit terms.

In 2022, China’s leaders will learn that not all lending is wise policy. While the treaty may appear favorable at first glance, China needs solvent borrowers and satisfied customers and allies, non-bilateral sleight of hand, defaults and disgruntled citizens.

Russia’s invasion of Ukraine

Globalization – the engine that drives China’s economy – is threatening to falter under pressure from the pandemic and Russia’s war with Ukraine. Supply chains are stretched and disrupted or restored with new routes and connections.

China’s leaders must ask themselves whether their political support for a declining, weak, and unpredictable Russia is worth more to China than an interconnected world in which all competitors agree on common rules and norms. Everyone benefits from such a global architecture.

Choosing Russia over the globalization her country is so entrenched in is a short-sighted, damaging economic trade that could lead to secondary sanctions against Chinese companies, the US has warned.

Russia can continue the war, weakened, shrunken, fueled by its oil and gas, but ostracized by most of the world. China, too, could pay a heavy price if it continues to support Russia at the expense of the trading system that the country depends on for economic growth.

All these difficult challenges suggest that the Chinese government’s official forecast of a growth rate of 5.5% in 2022 is overly optimistic. In fact, it now seems more than likely that China will grow below 5% in 2022 – a rate not seen since the 1989 Tiananmen Square crisis.

Such an economic outcome would be bad news for China and bad news for the rest of the world, even if we sometimes distrust each other.

Let’s hope the right decisions are made – decisions that are globally framed and not narrowly constructed.

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