The slowdown in the Chinese economy is causing problems for the United States and the world

In the run-up to this year’s Communist Party of China Congress, the problems for the Chinese economy are coming not as lone spies but as battalions. This should be a major concern for a weak US and global economy. So far, China has been the main engine of economic growth in the world. It was also the world’s largest consumer of international goods and a very large export market for the German economy, which is highly dependent on exports.

One of the main sources of China’s recent economic problems has been President Xi Jinping’s zero-tolerance policy on the coronavirus. In an effort to stem the epidemic, Xi has locked down major cities such as Shanghai and Beijing. Sometimes this included more than 350 million workers who were unable to work normally.

No wonder, then, that the once-fast-growing Chinese economy has virtually stalled. It only managed 0.4% growth during the fiscal year that ended in July. That was well below the government’s target of 5.5%.

One of the sources of the slowdown is believed to be Xi’s tough measures on the coronavirus.
Lee Gang / Xinhua via Getty Images

There appears to be little chance that the harmful COVID policy will be reversed anytime soon. Seeking a third term as president at the upcoming Communist Party congress, Xi cannot afford to lose face by changing COVID policy. However, this is very likely to delay any Chinese economic recovery.

Serious signs of trouble are also emerging in the all-important Chinese real estate sector. This sector accounts for approximately 30% of the country’s economy and about 70% of household wealth.

Already in the past year, 30 Chinese real estate developers, including the most important Evergrande, began defaulting on their mountain debts. They did so against the backdrop of government efforts to rein in credit expansion to put China’s housing market on a more sustainable footing.

They have also done so at a time when the Chinese property bubble has led to an estimated 65 million unoccupied housing units and credit is expanding at a faster rate than that preceded the 2007 US housing market crash. A sure sign that the Chinese property market bubble is now bursting is The continuous decline in real estate prices over the past year.

The growth rate has fallen far from the government's target of 5.5%.
China managed to achieve a growth rate of 0.4% during the fiscal year
Bloomberg via Getty Images

The real estate crisis in China appears to be deepening as an increasing number of families are refusing to make mortgage payments on properties they have purchased but not yet completed. This mortgage boycott, which now includes about one million households, could cause China’s real estate crisis to spread to the country’s banking system. This, in turn, threatens to derail the country’s growth prospects by anchoring its banking system with a mountain of non-performing loans as it did during Japan’s lost economic decade.

As if that wasn’t cause enough for concern, China has engaged in aggressive military maneuvers near Taiwan, possibly to distract from its economic woes in the run-up to the agreement. This is already discouraging foreign investment and raising questions about the wisdom of relying on China as a major part of the global supply chain and on Taiwan as an important supplier of electronic chips.

There is never a good time for a slowdown in China, the world’s second largest economy. However, now appears to be a particularly bad time for the challenging economies in the United States and other countries. Economic powerhouse Germany, which relies heavily on China for its exports, is already having to deal with deep cuts to Russian energy supplies. At the same time, debt-laden emerging market economies, which are already on the cusp of default, cannot withstand additional downward pressure on international commodity prices which could entail a further slowdown in the Chinese economy.

From the US point of view, the bleak outlook for China should raise questions about the wisdom of the Fed’s current tight monetary policy at a time when the US already appears to be on the cusp of a recession. Not only is a slowing Chinese economy likely to continue relieving US inflationary pressure by contributing to a further decline in global energy and food prices; It is also likely to constrain US export prospects by contributing to a further slowdown in the global economy.

Desmond Lachman is a senior fellow at the American Enterprise Institute. He was Deputy Director in the International Monetary Fund’s Policy Development and Review Department and Salomon Smith Barney’s Chief Emerging Market Economist.

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