China's economy is more than a weak spot in a faltering global expansion. Growth this year, assuming there is any, will likely fall well short of Beijing's own projections. The country may even turn in a worse performance than the US for the first time in more than a generation. These are momentous developments for which the world may be unprepared.
Growth was on a firm track before Covid, even if the economy had slowed considerably from the double-digit rates that followed China’s entry to the World Trade Organization in 2001. The once-rapid ascent spawned a cottage industry of reports tipping exactly when the behemoth would supplant America, which seems to have gone quiet. A contraction early in the pandemic was understandable; everyone suffered. China got back on its feet quickly, and the first three months of 2020 looked like a blip — until very recently. Beijing now faces a fresh, and daunting, set of challenges. As long as the government is wedded to a Covid-zero policy, it's hard to see any break from a series of stop-go expansions that start to resemble the America of the early-to-mid 1970s.
Living with Covid, the messy detente practiced in the US, Europe and important parts of Asia, has commercial, social and medical costs. Recent data show the price of persistently trying to quash the spread of the disease. Retail sales have plummeted, along with demand for credit. Industrial production is down and joblessness is growing. Youth unemployment hit a record. Officials are cranking up stimulus, mostly in the fiscal arena. Even so, this quarter looks like a write-off: Chang Shu and Eric Zhu of Bloomberg Economics expect gross domestic product will shrink 2.7% from a year earlier. For 2022, the expansion will be 2%, they say. If that forecast, a bit more pessimistic than the consensus, is born out, China will grow less than the US for the first time since Deng Xiaoping kicked off reforms in the late 1970s. (The US will expand 2.8% this year, reckons Bloomberg Economics, a smidge above the median forecast in a recent survey.)
How many times have you heard Wall Street grandees and former political leaders intone that the biggest event of their lifetime was the rise of China? Now that its economy is stumbling for the second time in little more than two years, it’s worth asking if something is going on beyond Covid.
When the OECD published a paper in 2018 projecting the world economy through 2060, its prediction that the US would eventually outpace China looked like a typo. Between 2030 and 2060, the country would expand an average of 1.8% a year, while the US would travel along at about 2%, the paper posited, a pace broadly similar to that of the preceding decade. This scenario wasn't based on a sudden upheaval, more a reflection of brutal demographic changes that have their roots in the one-child policy initiated early in the Deng era. (While officials abandoned the rule in 2015, the damage was done. Economists don’t anticipate the demographic narrative to change significantly; birth figures continue to slide and last year saw the fewest newborns since 1950.) Societies also tend to age as they move up the development ladder. Just ask South Korea, Japan and Singapore.
China seems resigned to subpar growth, at least in the medium term, judging from the timidity of Beijing's response to the latest downturn. The government will pump $5.3 trillion into the economy this year, according to a Bloomberg News calculation. That’s a lot relative to the size of GDP, which is about $17 trillion, but smaller than the assistance rolled out in 2020 when the pandemic erupted. Late Monday, the government announced new measures to shore up confidence, including additional tax relief. The monetary response, for its part, has been underwhelming. While Friday's cut in long-term lending rates won applause, 15 basis points of reduction isn't much to write home about. If the Federal Reserve had the benefit of low inflation — as the People's Bank of China does — and was faced with a cratering of overall activity, such a modest step would have Jay Powell laughed out of the room.
The sad reality is that with many business and social restrictions still in place, monetary easing doesn't buy very much beyond a boost for the ailing property sector. Better to keep some juice in the tank for when on-the-ground conditions are more sympathetic to a broader takeoff. Until then, the PBOC may be pushing on a string. Governor Yi Gang seems to have determined that Covid-zero isn't transitory.
It's possible to overstate the importance of China underperforming the US. The last time that happened, in 1976, the two economies were vastly different in terms of size, capacity, receptiveness to investment, education — pretty much everything. Multinational corporations, including those with headquarters in the US, were still years away from enmeshing mainland factories at, or near, the center of their supply chains. Nor has China completely collapsed under the weight of Covid. GDP climbed a respectable 8.1% in 2021.
Still, it has become clear that the world’s second-largest economy is no longer its guaranteed savior. When the International Monetary Fund made steep cuts to its growth forecasts last month and described a darkening international picture, China was one of the big worries. If a new global recession is in the wings, don’t look to Beijing for exceptionalism.
Bloomberg
