Much More Than Covid in China's Slowdown

It's tempting to blame the covid-19 lockdowns on China's slowing economy, but this is a faulty simplification.

The latest macroeconomic data suggest that China's slowdown is far worse than projected, and that it is not solely due to the covid-19 lockdowns.

Lockdowns have a significant influence. Twenty-six of China's mainland provinces are experiencing an increase in covid cases, raising fears of a Shanghai-style lockdown. According to information from Shanghai, these draconian curfews cause significant harm to the populace. Millions of people without food or medicine, as well as an increase in suicides, have demonstrated that the famed "zero covid" policy often conceals enormous population control and persecution.

It would be easy to blame the Chinese economy's weakness on the Covid-19 lockdowns, but it would be a poor simplification. The issue is very serious.

China is experiencing a severe recession as a result of the massive real estate bubble burst and the government's crackdown on the private sector, which has resulted in a drop in investment growth.

According to Nomura Research, China is experiencing its worst slowdown since the covid epidemic in 2020, and the rest of the globe should be concerned about a further decline as long as the obstacles remain. Official GDP estimates may be manipulated to meet the government's aim, while all other macroeconomic indicators indicate to significantly slower development.

It's important to remember that the Chinese government "boosts" real GDP in two ways: by presenting low inflation and GDP deflator figures and by ramping up credit and infrastructure spending. Those two, however, cannot deny the significance of China's economic weakness, which is now fundamental.

The main issue is the implosion of the real estate bubble. According to Kenneth Rogoff and Yuanchen Yang's research, China's real estate sector contributes for roughly 29% of the country's GDP. The Chinese government will be unable to balance the impact of such a large segment of the economy with other high-growth industries. Furthermore, the impact of real estate on the job market is difficult to replicate. The impact of the real estate crisis, according to economist George Magnus, will continue for years.

To make matters worse, the government's attack on the private sector has made it even more difficult to spur growth in other industries and firms. Fear of ongoing political meddling is causing a significant slowdown in foreign direct investment growth, as well as apprehension about investing capital and taking risks in the Chinese economy only to face severe penalties from the authorities once benefits are realized.

The severity of the Chinese economy's decline can be seen in recent leading indicators. In March 2022, the Caixin China General Manufacturing Purchasing Managers' Index (PMI) fell to a two-year low of 48.1, indicating contraction. In March, the Caixin Services PMI fell to 42.0 from 50.2 in February, falling below the line that distinguishes growth from contraction. This reading is the sharpest drop in activity since February 2020.

According to numerous media sources, political meddling in the technology sector, which is one of China's main job generators, has raised fears of frozen headcounts and layoffs. According to JP Morgan, the central bank's decision to lower reserve requirements for banks did not prevent a major drop in lending growth.

To this, we must add a currency, the yuan, which, according to Reuters, is used in fewer than 3% of worldwide transactions due to the central bank's strict capital controls and exchange rate regulation. Due to the excessive interference on the currency market, which prevents China from having a truly worldwide means of payment, confidence in the local currency is poor.

China's massive debt is another issue. According to the Institute of International Finance, total debt exceeds 300 percent of GDP. China's debt-to-GDP ratio for the entire private sector is currently over 250 percent, according to the European Central Bank (ECB), with the corporate component of this debt being the largest in the world. The ECB also mentions the risk posed by the fact that "a major share of finance is supplied to the corporate sector by non-bank financial firms," which leads to increased risk taking and a shadow banking system with large inefficiencies and solvency issues.

The forceful and erroneous lockdowns are harming supply chains and activity, but the underlying issues of rising currency and industry interference, as well as a deeply indebted economy, are likely to weigh on genuine growth and jobs for a long time.


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