Foreign capital dependency is high, but in February, foreigners sold China’s local-currency government bonds at an unprecedented pace, doubling the previous monthly high.
These uncertainties echo the doubts that dogged the US financial system in 2008, when lenders couldn’t tell which large borrowers would survive the crisis and credit markets froze.
Chinese politicians seem aware that they cannot afford confrontations that further destabilize the financial situation.
Liu He, Chinese President Xi Jinping’s top economic adviser, recently tried to calm markets by raising concerns about the government’s handling of problems in the real estate sector, regulation of major tech platforms, a spike in COVID-19 cases and more . His comments brought some relief to financial markets, but systemic risk in the real estate sector remains high.
The fact that credit growth in China remains weak despite central bank efforts to stimulate the economy could be an early sign of ‘Japanization’.
With rising debt, shrinking population and market turmoil, China is looking increasingly like Japan did in the 1990s. At this point, Japan fell into a deflationary trap as lenders were reluctant to lend no matter how much liquidity the central bank pumped into the system.
China’s total debt has tripled over the past three decades to nearly 300 percent of GDP, the level Japan reached around 1990 at the start of its so-called lost decades. China’s working-age population began shrinking in 2015, a step toward stagnation that Japan surpassed in the mid-1990s.
Fewer workers mean slower growth. Looking at data from 200 countries spanning six decades, my research found 38 instances where a country’s working-age population shrank over a full decade. GDP growth in these countries averaged just 1.5 percent and exceeded 6 percent in only three cases.
All three were small nations in special circumstances, such as recovering from a crisis.
Strong economic growth is virtually unheard of when the working-age population is shrinking, making it highly unlikely that Beijing can meet its growth target of nearly 6 percent, especially if productivity also falls.
Chinese state capitalism was a success when the state was in retreat, but it is now on the rise. The government is enacting aggressive new regulations for high-productivity sectors, such as B. Technology, and is taking draconian steps to control the pandemic.
Beijing’s campaign to limit COVID-19 cases to zero protected much of the population from infection but also left them vulnerable to new variants. Now these variants are increasing and triggering new lockdowns. Economic activity, including factory production and retail sales, is expected to contract this month and next.
The West, then, faces a more vulnerable and possibly less unified Eastern Front in each new Cold War than many global observers have realised.
With an economy one-tenth the size of China’s, Russia is in an unprecedented state of financial distress and largely cut off from the rest of the world.
But to an extent that is widely underestimated, China also faces perils and risks major damage to its fragile economy if it does anything to nullify foreign capital.
That means Beijing is likely to think twice before offering generous support to Russia or defying Western sanctions on the war.
The author is Chairman of Rockefeller International.
financial times
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