Amid falling home sales, and despite interest rate cuts and efforts by central and local governments to ease restrictions and boost activity, the development sector remains struggling. Last week, China’s third-largest developer, Sunac, missed a payment on a $742 million ($1 billion) offshore bond.
The government’s target economic growth rate of 5.5% for this year – the lowest in 30 years – is in jeopardy unless there is a hockey stick-like turnaround in the second half of the year. The International Monetary Fund has already cut its Chinese GDP growth forecast to 4.4% and private sector forecasts are below 4%. The economy is also expected to contract in the June quarter.
The scale of the slowdown in China has implications for the global economy, given the size of its economy and its importance as a key driver of global growth over the past few decades.
Officials continue to downplay the severity of the impact of the closures, despite empty street scenes in some of China’s biggest cities.Credit:PA
China’s role as the world’s largest manufacturing hub means that turmoil in its inland logistics, including disruptions at key ports, adds to supply chain issues that are a major factor in inflation spikes in major economies to levels not seen in decades.
There is a very real risk of a central bank-induced recession in the US, Europe (which is also facing an energy crisis caused by the war in Ukraine) and elsewhere. China’s economic difficulties add to this risk.
High single-digit inflation rates in the United States and Europe have triggered (or, in the case of Europe, will soon trigger) interest rate hikes which, in turn, will have a negative impact on China and will to some extent limit its ability to respond to its domestic challenges.
Even if the authorities have thrown him the political kitchen sink, as long as the zero COVID approach remains in place, the economy will likely remain strained and economic conditions volatile and highly dependent on the evolution of the pandemic.
The yuan has depreciated by about 4.5% against the US dollar in just over a month, with capital flowing out of China to the higher rates currently offered in the United States.
The Chinese authorities are very aware that cutting their own rates too aggressively in an attempt to stimulate activity could turn what is already a regular outflow of capital into a real destabilizing flight of capital.
China is unlikely to back down on its tough approach to COVID, indeed the rollout of thousands of permanent PCR testing kiosks suggests it is preparing to maintain the longer-term approach. Citizens cannot work, shop or travel unless they have a current negative test result.
The Communist Party’s 20th Five-Year National Congress looms later this year, in which Xi expects to see his term as leader extended by a historic third term. Xi is not going to admit a political mistake of such magnitude, despite the social misery and economic damage it causes.
Authorities deny, in fact, any material social impact of the policy and play down the severity of the closures, despite images of completely empty streets in some of China’s biggest cities, including Beijing and Shanghai.
The yuan fell sharply against the US dollar as investors pulled their money out of China.Credit:PA
China will not be able to revive growth unless it generates more domestic activity and, in particular, revives consumption and property market activity. Some Chinese economists have called for direct cash payments to households and it is expected that there will be more fiscal and monetary stimulus as this year progresses and the national congress draws closer.
China’s usual response to economic challenges is to increase infrastructure spending and this time around is unlikely to be any different (which should support demand for Australian resources) even if it does little to address the challenges. structural problems facing the economy.
The type of massive and broad stimulus that China unleashed in response to the outbreak of the pandemic in early 2020 and the 2008 financial crisis is unlikely due to the likely impact it would have on the yuan, flows capital and inflation.
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Even if the authorities have thrown him the political kitchen sink, as long as the zero COVID approach remains in place, the economy will likely remain strained and economic conditions volatile and highly dependent on the evolution of the pandemic.
This is not an encouraging prospect for China or the rest of the world.
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