As China’s economy falters, be careful what you wish for

It is becoming increasingly clear that the Chinese economy is facing significant headwinds. Most of this is Beijing’s own doing. A draconian zero COVID-19 policy has shut down swaths of the economy, severely hit consumer spending and cut factory output. Aggressive regulation of the tech sector, driven by Chinese President Xi Jinping’s withdrawal from private enterprise and his embrace of Maoist socialism, has crippled a once vibrant industry. A debt bubble in the country’s over-inflated property sector led to spectacular crashes, including the default of Evergrande, a huge property developer. Meanwhile, Russia’s invasion of Ukraine is driving up global prices for food, energy and other commodities imported by China. For all these reasons, the International Monetary Fund recently lowered its forecast for China’s economic growth to 4.4% this year, which is anemic by old Chinese standards. Bloomberg Economics predicts as little as 2% and expects the United States to grow faster than China for the first time since 1976.

Couple these recent trends with longer-term headwinds such as slowing productivity growth, population decline, and an ongoing brain drain among workers and tech entrepreneurs, and it becomes clearer that China is no It’s not the economic juggernaut that many Westerners think it is. In the context of increased geopolitical competition, this has led to a lot of schadenfreude, pure and simple joy and triumphalism in the West. Now, “the United States can shape China’s collapse just as it did the Soviet Union,” Robert Wilkie, veterans secretary in the Trump administration, said at the end of the session. last year.

Nevertheless, hoping for an economic collapse in China would be very unwise.

It is becoming increasingly clear that the Chinese economy is facing significant headwinds. Most of this is Beijing’s own doing. A draconian zero COVID-19 policy has shut down swaths of the economy, severely hit consumer spending and cut factory output. Aggressive regulation of the tech sector, driven by Chinese President Xi Jinping’s withdrawal from private enterprise and his embrace of Maoist socialism, has crippled a once vibrant industry. A debt bubble in the country’s over-inflated property sector led to spectacular crashes, including the default of Evergrande, a huge property developer. Meanwhile, Russia’s invasion of Ukraine is driving up global prices for food, energy and other commodities imported by China. For all these reasons, the International Monetary Fund recently lowered its forecast for China’s economic growth to 4.4% this year, which is anemic by old Chinese standards. Bloomberg Economics predicts as little as 2% and expects the United States to grow faster than China for the first time since 1976.

Couple these recent trends with longer-term headwinds such as slowing productivity growth, population decline, and an ongoing brain drain among workers and tech entrepreneurs, and it becomes clearer that China is no It’s not the economic juggernaut that many Westerners think it is. In the context of increased geopolitical competition, this has led to a lot of schadenfreude, pure and simple joy and triumphalism in the West. Now, “the United States can shape China’s collapse just as it did the Soviet Union,” Robert Wilkie, veterans secretary in the Trump administration, said at the end of the session. last year.

Nevertheless, hoping for an economic collapse in China would be very unwise.

First, recessions hurt a lot of average people. Although the Chinese Communist Party is becoming increasingly totalitarian at home and revisionist abroad, there are more than 1.3 billion Chinese who have no ties to the party. They will bear the brunt of China’s economic tumult, as will low-income Americans and less well-off people around the world. All will be caught up in the fallout when the world’s second-largest economy falters.

Since Beijing’s economic liberalization began in the late 1970s, an estimated 800 million Chinese have been lifted out of extreme poverty. Despite Beijing’s troubling turn toward illiberalism, China’s massive reduction in poverty remains one of the world’s most significant humanitarian success stories. A recession – whether due to Xi and the party taking control of the economy or other causes – will hurt average Chinese citizens. To try to soften the blow, China already plans to inject $5.3 trillion into its economy, about a third of the size of its overall economy, through fiscal and monetary measures this year. These include increased loans to small businesses, reductions in taxes and administrative costs, and subsidies for consumer purchases.

In the United States, the average American is at risk given the high degree of economic integration between the two countries. Americans continue to consume goods from China at a record pace, despite higher tariffs imposed as part of the US-China trade war. As U.S. inflation soars and China continues to be crucial in U.S. corporate supply chains, slowing Chinese manufacturing due to Beijing’s pandemic policies will put even more upward pressure on prices in the United States, hitting American consumers and businesses that are already struggling to cope with the resurgence of inflation. Meanwhile, the US economy contracted in the first quarter of 2022, and economists are increasingly predicting a US recession over the next year, even without the added hit of a Chinese implosion.

China is also an important foreign market for American goods and services, surpassed only by Canada and Mexico. A slowing Chinese economy means lower demand for American goods, including cars, electrical machinery, medical equipment and fuel, hurting American businesses and workers who depend on exporting to China .

Finally, the Chinese Communist Party derives much of its legitimacy from the continued growth of the economy and the rise in the country’s standard of living. If a major economic downturn thus threatens to weaken the party’s grip on power, one likely outcome would be an even more aggressive nationalist foreign policy. Nothing like a bit of chauvinism and war to divert attention from domestic problems. Yes, an economically weaker China would face more difficult trade-offs between military spending and other goals. But there is no guarantee that Beijing will not double down on its aggressive stance abroad and tighten elsewhere.

With a major ground war raging in Europe, the slowing US economy and increasingly visible problems in China, the risk of a global recession is growing. As Harvard University economist Kenneth Rogoff recently reminded us, “a collapse in one region will increase the chances of a collapse in others.”

To be clear, Beijing’s economic practices pose significant challenges that need to be addressed, whether it’s unfair competition with Western market-oriented economies or China’s systematic weakening of the rules. But the way to force China to play a more constructive role in the global economy is to address these issues head-on, not by hoping its economy collapses. A significant slowdown in China could have serious and unforeseen consequences for the rest of the world, so be careful what you wish for.

Comments are closed.