China’s economy is more than a weak spot in a faltering global expansion. Growth this year, assuming there might be any, is likely to fall well short of Beijing’s own projections. The country might 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 might be unprepared.
Growth was on a firm track before COVID-19, even if the economy had slowed considerably from the double-digit rates that followed China’s entry to the WTO in 2001. The once-rapid ascent spawned a cottage industry of reports tipping exactly when the behemoth would supplant the US, at trade that seems to have gone quiet.
A contraction early in the COVID-19 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 faces a fresh, and daunting, set of challenges. As long as the government is wedded to a “zero COVID” policy, it is hard to see any break from a series of stop-go expansions that begin to resemble the US of the early-to-mid 1970s.
Living with COVID-19, the messy detente practiced in the US, Europe and important parts of Asia, has commercial, social and medical costs. The cost of persistently trying to quash the spread of the disease is shown in data. 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 (舒暢) and Eric Zhu (朱懌) of Bloomberg Economics expect gross domestic product to shrink 2.7 percent from a year earlier. For this year, the expansion is expected to be 2 percent, they said.
If that forecast, a bit more pessimistic than the consensus, is borne out, China could grow less than the US for the first time since Deng Xiaoping (鄧小平) kicked off reforms in the late 1970s. (The US is expected to expand 2.8 percent this year, slightly above the median forecast in a recent survey, Bloomberg Economics said.)
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 is worth asking if something is going on beyond COVID-19.
When the Organisation for Economic Co-operation and Development 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 percent per year, while the US would travel along at about 2 percent, the paper said, a pace broadly similar to that of the preceding decade.
This scenario was not 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. Although Chinese officials abandoned the rule in 2015, the damage was done. Economists do not anticipate the demographic narrative to change significantly; birth figures continue to slide, and the fewest newborns since 1950 were recorded last year.
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. Beijing is likely to pump US$5.3 trillion into the economy this year, a Bloomberg News calculation showed.
That is a lot relative to the size of GDP, which is about US$17 trillion, but smaller than the assistance rolled out in 2020 when the pandemic erupted.
Beijing on Monday last week 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 is not much to write home about. If the US Federal Reserve had the benefit of low inflation — as the People’s Bank of China (PBOC) does — and was faced with a cratering of overall activity, US Federal Reserve Chairman Jerome Powell would have been laughed out of the room for taking such a modest step.
The sad reality is that with many business and social restrictions still in place, monetary easing does not 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 might be pushing on a string. PBOC Governor Yi Gang (易綱) seems to have determined that “zero COVID” is not transitory.
It is 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 Chinese factories at, or near, the center of their supply chains. Nor has China completely collapsed under the weight of COVID-19. GDP climbed a respectable 8.1 percent last year.
Still, it has become clear that the world’s second-largest economy is no longer its guaranteed savior. When theIMF 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, do not look to Beijing for exceptionalism.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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