The four big threats to China’s economy
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William Rhodes and Stuart Mackintosh noted four economic risks that could affect China.
Future Publishing | Future Publishing | Getty Images
William R. Rhodes is the CEO of William R. Rhodes Global Advisors and former Chairman and CEO of Citibank. He also wrote “The following commentary.”Banker to the World: Leadership Lessons from the Front Lines of Global Finance“; and Stuart Mackintosh is executive director of non-profit The Group of Thirty.
It is important that we all pay attention to what happens in China because it can have a huge impact on us all.
Economic dangers and Chinese President Xi Jinping’s responses to them will affect China first and foremost — but trouble in China could become trouble everywhere this year and next.
The atrocities committed in Ukraine by Russia are rightly being highlighted. China’s support for Russia only serves to strain globalization.
China’s challenges economics go well beyond the conflict. China is facing increasing threats in four areas that are interconnected but not necessarily in the same way: home, health, debt and on a fractured globe.
Real estate
China’s leaders should ask themselves if their support of a weakening, unpredictable Russia is more valuable to China than an interconnected world where all its competitors adhere to the same rules and norms.
An economic downturn in real estate is bad news for all of the country. Most recessions are caused by equity and housing busts according to economists. We know that debt can have a negative impact on home price declines. When home prices start to fall, then we see the effects of the first. When house prices decline, homeowners who are underwater stop spending.
China is not at that dangerous juncture yet.However, the indicators are not encouraging. To assume that China can control the prices of all citizens indefinitely or that China will not experience normal economic booms and busts would be unrealistic. We can only hope that they will manage housing more effectively than the West in 2007-2008.
‘Zero-Covid’
China’s property markets are shaking and the economic effects of the pandemic strategy are making matters worse.
China’s zero Covid strategy, which is the harshest public and medical response to pandemics anywhere in the world, has been running into problems. China’s rigid stance toward prevention paid huge dividends — the country continued to operate largely free of the virus in 2020 and 2021.
These measures are likely to be more expensive today, however, because the virus is rapidly spreading and mutating. An uptick in cases in Shanghai to about 20,000 a day last weekIt was shut down by citizens, which prompted anger among residents and forced 26 million to be quarantined. China’s biggest port and contributing 4 percent to China’s GDP, Shanghai is Shanghai.
China is witnessing lockdowns in many cities. It will be obvious in months to come how the hard-to sustain Covid policy is affecting economic performance. Already, economists have begun to reduce growth projections for China.
All outsiders may also feel any decrease in demand from China. It’s unclear whether the central government is willing or able to pivot from zero tolerance to a new approach — even though such a shift appears increasingly necessary to outsiders.
External loans that are risky
The developed world is trying to control inflation by raising interest rates. As part of Beijing’s Belt and Road Initiative, many loans given by Chinese entities are not only straining the balance sheets of low-income countries around the world but will also cause nonperforming loans to China’s banks. These loans will negatively impact China’s economic performance, as they are crucial conduits of Chinese domestic investment, business, and economy.
Belt and Road has saddled developing states with at least $385 billion in debtsAccording to the 2021 report by AidDataInternational development research laboratory based at The College of William and Mary in Virginia.
China is facing three problems: China’s debt defaults and non-performing loans from its biggest banks and state lender, as well as collateral damage to geopolitical and diplomatic interests, if it seizes assets of nations in return for sometimes unfeasible loan terms.
China’s 2022 leadership will realize that not all lending can be considered smart policy. China does not need to borrow from other countries, nor do they want angry people.
Russia invades Ukraine
Globalization — the engine that powers China’s economic engine — risks stalling under the pressure of the pandemic and Russia’s war with Ukraine. The supply chain is stretched, broken or reconstituted using new links and routes.
China’s leaders need to ask themselves whether supporting a falling, weak and unpredictable Russia in their politics is better than supporting an interconnected global world that all countries agree on general rules and standards. This global structure is good for everyone.
The choice of Russia over globalization, in which the country is deeply embedded, is shortsighted and damaging. It could lead to secondary sanctions against Chinese companies, as has been warned by the U.S.
Russia might continue war. It may shrink, be weaker, and be fuelled by oil and natural gas. However, it will likely remain isolated from the majority of countries around the globe. China could also be paying a high price for continuing to support Russia, at the cost of engaging with its trading system that is vital for their economic growth.
All these difficult issues suggest that the Chinese government’s forecast of a 5.5 percent annual growth rate for 2022 may be too optimistic. Indeed, it now seems more likely than not that China will grow at below 5 percent in 2022 – a rate not seen since the crisis of 1989 in Tiananmen Square.
This economic outcome is bad for China and for all of humanity, even though we often distrust each other.
Let us hope the right choices are made — choices that are globally framed rather than narrowly constructed.
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