China's economy is depressed

2023-08-18 12:05:43

It was almost feared that the restart of the Chinese economy would be too abrupt after the lifting of the very strict “zero COVID” policy. We fear today that it is too weak, much too weak.

It’s the world upside down. In Canada and the United States, we keep announcing an economic recession that does not come despite the central banks’ repeated interest rate hikes in their effort to bring inflation into line. In China, the extraordinary economic engine is unable to restart, even after having been slowed down for a long time, to the point where the specter of deflation is now being raised.

For months there has been talk of the dire social and economic effect of China’s zero-COVID policy and the growing grassroots protest movement it fueled. When Beijing announced its lifting last December, experts surmised it would mean a tremendous release of pent-up economic energy that would boost demand for all those goods and services the second power normally craves. economy of the world. And, by the very fact, that it would feed even more the inflation against which several countries were fighting.

However, the powerful Chinese economic engine barely had time to roar when it immediately stalled. Between the first and second quarters, China’s economy grew by just 0.8%, seriously jeopardizing its chances of meeting the government’s relatively modest 5% growth target. Modest, explained last week The Economistbecause very far from what the country has accustomed us to in the last 40 years, and the fact that we did not do better than 3% last year.

This prompted, for example, Barclays bank to revise down its growth forecast to 4.5% for this year and 4% for next year, the report reported on Wednesday. New York Times.

We also learned last week that Chinese exports had fallen again last month, by 14.5% over one year. Other indicators of the lack of vigor in the local manufacturing sector, imports did not do better, with a fifth negative month in a row (-12.4%).

Far from getting better, the real estate crisis would also be making a new major victim, one of the most important Chinese promoters, Country Garden, approaching more and more dangerously of bankruptcy. It comes as house prices have fallen in 49 of the country’s 70 largest cities and investment in the sector has been scarce for the past five months.

We could also have learned, last week, that youth unemployment has widened for a seventh month in a row, if the government had not suddenly decided to suspend the publication of this kind of statistics. Their unemployment rate was down to 21.3% in June.

But, even more concerning, prices fell 0.3% last month. The phenomenon, which would not be so serious if it were isolated, comes at the end of seven months, the average of which was only 0.5%, noted The world last week, which is far from the monetary authorities’ 3% target and much too close to the threshold at which we begin to talk about deflation.

An obsession of the public authorities, the deflationary spiral can be summed up by the sequence of a fall in prices which encourages consumers to constantly postpone their spending, which leads to an economic slowdown and thus leads to further price reductions.

Another kind of long COVID

Like all complex phenomena, this bad patch of the Chinese economy is attributed to a set of often interrelated factors.

The decline in exports would result in particular from the global economic slowdown and the distance that several Western countries have decided to take in relation to China.

The explosion of youth unemployment is due, in turn, not only to the general slowdown in the economy, but also to the fact that the upheavals caused by the pandemic have delayed the entry of many of them into the labor market. and that they all arrive today at the same time, explained the New York Times mardi.

As for the real estate sector, it’s the story of a speculative bubble that we’ve been trying to slowly deflate for several years now, without suddenly bursting. One of the only ways for the Chinese to accumulate wealth, the sector is struggling with falling prices and with developers so indebted that they end up financing the end of the construction of housing which will remain empty in selling other homes still on paper.

Already very economical because they cannot count on a real social safety net in the event of a hard blow, Chinese consumers have begun to save even more (+15% in one year), noted last month the Peterson Institute for International Economics (PIIE).

Household confidence surveys showed almost no improvement since the zero COVID policy was lifted until the authorities decided, again, to halt their publication in the spring.

The solution, in such circumstances, is normally found. The central bank should cut interest rates and governments should roll out juicy economic stimulus packages, especially if there is a danger of deflation.

The Chinese authorities have already done this in the past, with success. But so far, they have only given birth to very timid measures, observed the Financial Times last week. Perhaps because governments, especially local ones, are already more indebted there than ever (almost 300% of GDP).

Perhaps because they fear that the injection of new liquidity will still go to buildings and roads that no one needs, while President Xi Jinping has said he wants his country to reach a higher stage of development. economic, observed last weekend the Globe and Mail. The problem is that with all of his heavy-handed interventions against anyone in China inc. risked overshadowing him – like the founding president of Alibaba, Jack Ma -, but especially with his “zero COVID” policy, Xi Jinping has sown deep doubt in the minds of consumers and businesses, wrote at the beginning of the the president of the PIIE, Adam Posen, in Foreign Affairs. We say to ourselves that at any time, the Chinese state can come and lay down its law, whatever the rules in force until then or the economic consequences. “Call it: a case of ‘economic long COVID. »

” Time bomb “

“China is a ticking time bomb,” said Joe Biden last week. Not only because of its weight in the world economy, but also because “when bad people have problems, they do bad things”, affirmed the American president.

It is true that China alone has accounted for nearly 40% of global economic growth over the past 10 years, compared to 22% for the United States and 9% for the euro zone.

This is not the first time that the collapse of the Chinese economy has been announced, and each time it has come out of it rather well, several analysts assured the newspaper. The echoes last week. After years of growth artificially supported by public funding of unnecessary infrastructure, China is engaged in a delicate normalization operation which should end well, argued one of them.