William Rhodes and Stuart Mackintosh identified four distinct but overlapping economic risks for China.
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The following commentary is co-authored by William R. Rhodes, CEO of William R. Rhodes Global Advisors, former Chairman and CEO of Citibank and author of “Banker to the World: Leadership Lessons from the Front Lines of Global Financeand by Stuart Mackintosh, executive director of the non-profit organization The Group of Thirty.
We should all care about what is happening in China because it will affect us all.
Economic dangers and Chinese President Xi Jinping’s responses to them will affect China first and foremost – but problems in China could lead to problems anywhere this year and next.
The world is rightly focusing on Russia’s atrocities in Ukraine, and China’s choice to stand with Russia is straining the bonds of globalization.
But China’s economic challenges go beyond war. Threats to China’s outlook are growing in four distinct but overlapping areas: at home, in health, in debt, and in a fractured world.
A slump in real estate bodes ill for the economy as a whole. Economists have shown that most recessions are either linked to the equity crisis or to the housing crisis. Once house prices shake and start to fall, we know the effect of debt on lower house prices: the former amplifies the latter and can cause a collapse in broader consumption. Underwater homeowners stop spending as their home prices drop.
China is not yet at this dangerous turning point. But the signs are worrying. We would be naive to think that the normal economic boom and bust rules never apply in China, or to assume that the Chinese authorities can always effectively control prices nationwide indefinitely. Still, hopefully they can manage housing better than the West did in 2007-2008.
As China’s property markets are shaking, the effects of pandemic politics are worsening the economic situation.
China’s zero Covid policy, by far the toughest medical and public health response to the pandemic, is in trouble. China’s rigid stance on prevention paid off – the country continued to operate largely virus-free in 2020 and 2021.
Today however, as the virus mutates and spreads rapidly, these measures can be more costly. A rise in the number of cases in Shanghai to around 20,000 a day last week caused the city to shut down, sparking anger among citizens and the quarantine of 26 million residents. Shanghai alone contributes 4% of China’s gross domestic product and is its largest port.
Lockdowns are being imposed in cities across China. The negative economic effects of its difficult to maintain Covid policy will become visible in the months to come. Already, economists are cutting growth forecasts for the country.
If demand in China weakens, everyone outside the country could also feel it. It’s unclear whether the central government is willing or able to move from zero tolerance to a new approach – although such a change seems increasingly necessary to outsiders.
Risky external borrowings
Interest rates are rising as the developed world tries to contain inflation. Many loans from Chinese entities under Beijing’s Belt and Road Initiative are not only straining the balance sheets of low-income countries around the world, but will also strain Chinese banks with unsecured loans. efficient. This, in turn, will affect the economic performance of these banks, which are key conduits for Chinese domestic investment, business and the economy.
Belt and Road has burdened developing states with at least $385 billion in debt, according to a 2021 report by AidData, an international development research lab based at the College of William and Mary in Virginia.
There, China faces three negative dynamics: defaults, nonperforming loans on the books of its largest banks and state lenders, and collateral damage to diplomatic and geopolitical interests if it seizes the assets of nations under sometimes onerous loan conditions.
In 2022, Chinese leaders will learn that not all loans are smart policy. Even if the deal looks good on the face of it, China needs creditworthy borrowers and happy customers and allies, not bilateral sleight of hand, defaulters and angry citizens.
The Russian invasion of Ukraine
Globalization – the engine that powers China’s economy – risks stalling under the strain of the pandemic and Russia’s war with Ukraine. Supply chains are stretched and broken, or else reconstituted with new routes and links.
Chinese leaders must ask themselves if their political support for a declining, weak and unpredictable Russia is worth more to China than an interconnected world in which all competitors accept general rules and standards. Everyone benefits from such a global architecture.
Choosing Russia over the globalization in which their country is so deeply embedded is a shortsighted and damaging economic bargain, which could lead to secondary sanctions against Chinese companies, as the United States has warned.
Russia can continue the war, diminished, shrunken, fueled by its oil and gas, but ostracized by most countries in the world. China, too, could pay a heavy price if it continues to support Russia at the expense of its engagement with the trading system that the country relies on for economic growth.
All of these tough challenges suggest that the Chinese government’s official forecast of a 5.5% growth rate in 2022 is overly optimistic. Indeed, it now seems more likely than not that China will grow by less than 5% in 2022 – a rate not seen since the 1989 crisis in Tiananmen Square.
Such an economic outcome would be bad news for China and bad news for the rest of the world, even if we are sometimes suspicious of each other.
Hopefully the right choices will be made – broadly framed choices rather than narrowly constructed ones.