Ahead of this year’s Chinese Communist Party Congress, the Chinese economy is struggling not in the form of individual spies, but in battalions. This must be of significant importance to a vulnerable US and global economy. So far, China has been the world’s most important economic engine. It was also the world’s largest consumer of international commodities and a very large export market for the heavily export-dependent German economy.
A major cause of the Chinese economy’s recent troubles has been President Xi Jinping’s zero-tolerance COVID policy. To stamp out the pandemic, Xi put major cities like Shanghai and Beijing under lockdown. At times, this affected more than 350 million workers who were unable to work normally.
No wonder, then, that the once fast-growing Chinese economy came to a virtual standstill. In the fiscal year that ended in July, it only managed to achieve a growth rate of 0.4%. That fell far short of the government’s 5.5 percent target.
One of the sources of the slowdown is believed to be Xi’s strict COVID measures. Li Gang/Xinhua via Getty Images
There seems little prospect of a reversal of these harmful COVID policies any time soon. Xi is seeking a third term as president at the upcoming Communist Party convention and cannot afford to lose face through a U-turn on COVID policy. However, this will very likely delay a recovery in the Chinese economy.
Serious signs of trouble are also emerging again in China’s all-important real estate sector. This sector accounts for almost 30% of the country’s economy and almost 70% of household wealth.
Last year, 30 Chinese real estate developers, most notably Evergrande, defaulted on their mountains of debt. They did so amid government efforts to rein in credit expansion to put China’s housing market on a more sustainable footing.
They also did so at a time when China’s housing bubble resulted in an estimated 65 million vacant housing units and faster credit expansion than before the US housing market busted in 2007. A sure sign that the Chinese housing bubble is now bursting is the steady decline in property prices over the past year.
China managed to achieve a growth rate of 0.4% in the fiscal year Bloomberg via Getty Images
China’s housing crisis appears to be deepening as a growing number of households are refusing to make mortgage payments on properties they have bought but are unfinished. This mortgage boycott, which now affects around a million households, could result in China’s housing crisis spilling over into the country’s banking system. That, in turn, threatens to hurt the country’s growth prospects by burdening its banking system with a mountain of bad loans, much like Japan’s lost economic decade.
As if that wasn’t cause enough for concern, China has been conducting aggressive military drills near Taiwan, perhaps to distract from its economic woes in the run-up to Congress. This is already discouraging foreign investment, raising questions about the wisdom of relying on China as a key link in the global supply chain and Taiwan as a key supplier of electronic chips.
There’s never a good time for a slowdown in China, the world’s second largest economy. However, now seems to be a particularly bad time for the struggling economies of the United States and other nations. The economic powerhouse Germany, which is heavily dependent on China for its exports, is already having to cope with massive Russian energy supply cuts. At the same time, the heavily indebted emerging markets, which are already on the brink of default, can hardly afford the additional downward pressure on international commodity prices that a further slowdown in the Chinese economy would bring.
From a US perspective, China’s bleak outlook must raise questions about the prudence of the Federal Reserve’s current tight monetary policy when the US already appears to be on the brink of recession. Not only is it likely that China’s slowing economy will continue to ease US inflationary pressures by contributing to a further fall in international energy and food prices; It is also likely to weigh on 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 Associate Director in the International Monetary Fund’s Department of Policy Development and Review and Senior Economic Strategist for Emerging Markets at Salomon Smith Barney.
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