China’s slowdown: much more than Covid

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Written by Daniel Lacalle

The latest macroeconomic figures show that the Chinese slowdown is much more severe than expected and is not only due to Covid-19 lockdowns.

Closures have an enormous impact. twenty six of 31 provinces in mainland China have rising Covid cases and the fear of a Shanghai-style lockdown is massive. Information from Shanghai proves that these strict lockdowns are causing huge damage to the population. Millions of citizens without food or medicine with high suicide rates have shown that zero is notorious Covid policy often hides mass control of the population and repression.

It’s easy to use Covid-19 lockdowns as a reason to weaken the Chinese economy, but that would be an oversimplification. The problem is deeper.

China is going through a sharp slowdown caused by the bursting of a massive real estate bubble and the crackdown on the private sector, slashing investment growth.

According to Nomura Research, China is facing its worst slowdown since The Covid outbreak is in 2020 and the world must be concerned about further slippage, as challenges remain. Official GDP figures may be used to achieve the government’s target, but all other aggregate numbers indicate much weaker growth.

It must be remembered that there are two ways in which the Chinese government can “boost” its real GDP: by publishing a lower figure for inflation and the GDP deflator and by significantly increasing spending on credit and infrastructure. However, these two cannot hide the importance of weakening the Chinese economy, because it is now structural.

The collapse of the real estate bubble is the biggest problem. A research paper by Kenneth Rogoff and Yuanchen Yang estimated that the real estate sector accounts for about 29 percent of China’s GDP. It is impossible for the Chinese government to offset the impact of this huge part of the economy with other high-growth sectors. Moreover, it is difficult to offset the effect of real estate on the labor market. Economist George Magnus has warned that the impact of the real estate crash will last for years.

To add to a difficult real estate problem, the government crackdown on the private sector makes it even more difficult to promote growth in other industries and businesses. Fear of continued political interference leads to a massive slowdown in the growth of foreign direct investment as well as the fear of investing capital and risk in the Chinese economy to suffer severe penalties from the authorities when profits arrive.

The extent of the deterioration of the Chinese economy is evident in the recent leading indicators. The Caixin China General Manufacturing Purchasing Managers’ Index (PMI) fell to a 25-month low of 48.1 in March 2022, indicating contraction. The Caixin Services PMI fell to 42.0 in March from 50.2 in February, well below the level that separates growth from contraction. This reading indicates the largest drop in activity since February 2020.

Political interference in the technology sector, which is one of the leaders in job creation in China, has raised fears of staff freezes and layoffs, according to various media reports. In addition, the central bank’s decision to cut reserve requirements for banks did not prevent a significant drop in credit growth, as reported by JPMorgan.

To all this, we must add the yuan, which is used in less than 3 percent of global transactions, according to Reuters, due to tight capital controls and exchange rate stabilization imposed by the central bank. Confidence in the local currency is low due to heavy intervention in the currency market, which prevents China from having a truly international means of payment.

China’s high debt is also a problem. Total debt is more than 300 percent of GDP, according to the Institute of International Finance. The European Central Bank (ECB) reports that the ratio of Chinese debt to GDP for the entire private sector is now more than 250 percent and the corporate component of this debt is the highest in the world. The European Central Bank also refers to the risks that have arisen due to “a large proportion of financing provided to the corporate sector by non-bank financial institutions” resulting in increased risk and shadow banking system which leads to significant inefficiencies and solvency challenges.

Strong and misleading shutdowns are affecting supply chains and activity, but structural problems of increased currency and industry intervention, as well as an indebted economy, are likely to affect real growth and jobs for the long haul.

disclosure: No jobs.

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Editor’s note: The bulleted summary of this article was selected by searching for the alpha editors.

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