In the run-up to the Chinese Communist Party convention this year, troubles are coming to the Chinese economy not as single spies but battalions. This must be of considerable concern for a vulnerable US and global economy. Until now, China has been the world’s main engine of economic growth. It has also been the world’s largest consumer of international commodities and a very large export market for the highly export-dependent German economy.
One major source of the Chinese economy’s recent troubles has been President Xi Jinping’s zero-tolerance COVID policy. In an effort to eradicate the pandemic, Xi locked down major cities like Shanghai and Beijing. At times this involved more than 350 million workers unable to work normally.
Little wonder then that the formerly fast-growing Chinese economy ground to a virtual halt. It managed to eke out only a 0.4% growth rate over the fiscal year that ended in July. That fell far short of the government’s 5.5% target.
There seems little prospect this damaging COVID policy will be reversed anytime soon. Seeking a third term as president at the forthcoming Communist Party Convention, Xi can’t afford to lose face by making a COVID-policy U-turn. Yet this very likely will delay any Chinese economic rebound.
Serious signs of trouble are also resurfacing in China’s all-important property sector. That sector accounts for almost 30% of the country’s economy and almost 70% of household wealth.
Already last year, 30 Chinese property developers, including most importantly Evergrande, began defaulting on their debt mountains. They did so against the backdrop of the government’s effort to rein in credit expansion to put China’s housing market on a more sustainable basis.
They also did so at a time when the Chinese property bubble led to an estimated 65 million unoccupied housing units and credit expanding at a faster clip than that which preceded the US 2007 housing market bust. A sure sign that the Chinese property market bubble is now bursting is the steady decline in property prices over the past year.
China’s property crisis seems to be deepening as a growing number of households refuse to make mortgage payments on properties they bought but are yet to be completed. This mortgage boycott, which now involves around a million households, could cause China’s property crisis to spread to the country’s banking system. That, in turn, threatens to hobble the country’s growth prospects by landing its banking system with a mountain of non-performing loans much as occurred during Japan’s lost economic decade.
As if this were not sufficient reason for concern, China has been engaging in aggressive military exercises near Taiwan, perhaps to distract from its economic woes in the run-up to the convention. This is already discouraging foreign investment and raising questions about the wisdom of relying on China as a key part of the global supply chain and on Taiwan as an important supplier of electronic chips.
There’s never a good time for a slowdown in China, the world’s second-largest economy. However, now seems a particularly bad time for the challenged economies of the United States and other nations. Economic powerhouse Germany, which is highly dependent on China for its exports, is already having to cope with large Russian energy-supply cuts. At the same time, the heavily indebted emerging-market economies, already on the cusp of default, can ill-afford additional downward pressure on international commodity prices that a further slowing in the Chinese economy would entail.
From a US perspective, the grim Chinese outlook has to raise questions about the wisdom of the Federal Reserve’s current hawkish monetary policy when the US already appears to be on the cusp of a recession. Not only is China’s slowing economy likely to continue relieving US inflationary pressure by contributing to a further decline in international energy and food prices; it’s also likely to restrict US export prospects by contributing to a further slowing in the global economy.
Desmond Lachman is a senior fellow at the American Enterprise Institute. He was a deputy director in the International Monetary Fund’s Policy Development and Review Department and chief emerging-market economic strategist at Salomon Smith Barney.