China’s economy is increasingly isolated from the West
As the Beijing Winter Olympics begin, all eyes are on China. There have been a lot of reports about China’s cold relations with the West and its persecution of Uyghurs and other minorities, but there is also a lot to be said about China’s economy.
China’s great rise in recent decades has been the great economic success of our time, lifting hundreds of millions of people out of poverty and giving wheels to the global economy in the years following the financial crisis of 2007-09.
Over the past decade, however, the miracle has become a little more ordinary as growth has gradually slowed. China has struggled to continue growing its exports at the same pace year after year, especially in the face of weaker international demand for its products, including due to the trade war with the United States. Other problems included an aging population and the fact that growth had become increasingly dependent on debt, which was unsustainable.
China’s economic growth 1997-2021
China appears to have weathered the pandemic better than many major economies, having contained the virus so aggressively. Yet the situation has since deteriorated as new national outbreaks of Covid, including the new omicron variant, have caused further economic disruption.
The effect of Omicron on other major economies is also not good news for Chinese exports. Nor has the resurgence of inflation in many countries prompted the US Federal Reserve and other central banks to threaten to raise interest rates and end money creation via quantitative easing. This should further dampen demand for Chinese products.
China’s debt has also become an even bigger problem. Leading property developer Evergrande’s financial struggles in 2021 grabbed headlines, but excessive debt is rampant throughout the real estate industry and beyond. If the bubble bursts, it could lead to a prolonged downturn that would significantly damage the wider economy.
The government has pressured big business to reduce debt, while limiting borrowing in the property sector and cracking down on informal lending across the country. He also sent a warning to excess borrowers by his willingness to let Evergrande default.
Falling exports and debt reduction mean China is heading for a slowdown: the World Bank projects its economic growth to be just over 5% in 2022, down from 8% in 2021.
More broadly, China’s traditional growth model based on exports, infrastructure and real estate investment seems to have run its course. The nation faces a difficult rebalancing act as it aims to shift to a much greater reliance on Chinese households consuming goods and services, while having to transition to a much less carbon-intensive economy.
Unfortunately for the ruling Communist Party, the best way to achieve this rebalancing is arguably to implement reforms that would limit government influence in Chinese life. For example, the World Bank believes China must make it easier for businesses to fail and allow greater private competition in sectors like education and health to increase productivity. It also recommends allowing workers to move around the country by removing the hukou registration system in cities, since this system stipulates where someone permanently resides.
Some World Bank recommendations involve greater government intervention, such as making the tax system more progressive to encourage consumers to spend more, and increasing public spending on health and education so people don’t have to. need to save so much. Generally speaking, however, further liberalization is on the agenda – and seems to be the right way forward in my view.
Yet China has become more interventionist in the Xi era, cracking down on everything from tech billionaires to the number of hours children can play video games each day. Meanwhile, China’s zero Covid strategy has involved tightly sealed borders, rapid citywide lockdowns and mass testing.
China adopted this strategy partly out of fear that its poor healthcare system would be completely overwhelmed by Covid, and more recently as a means of ensuring the smooth running of the Winter Olympics. However, the climate in China is such that some commentators fear that it will reopen, that the health crisis will turn into a political crisis of more committed isolation.
China is therefore at a crossroads. On the one hand, it wants to play a bigger role in the global economy, as evidenced by its Belt and Road Initiative to boost infrastructure development around the world in exchange for closer ties with Beijing.
But there is a contradiction between continuing to engage in global trade and the Chinese government’s instinct for technological self-sufficiency and local innovation. Trade liberalization also involves, for example, opening up the banking sector to foreign lenders to make it more efficient. However, we are far from Beijing’s interventionist approach. Indeed, the fact that banks, which are partly state-owned, were mandated to lend to state-owned enterprises in poor financial condition was the cause of many debt problems in the first place.
Unfortunately, the indications are that China is more likely to move towards greater western isolationism. This could mean restricting visits to the country and focusing more on domestic consumption than global trade. We could see him moving further away from globalization via trade wars, as well as imposing more capital controls to make it harder for money to move in and out of the country. Clearly, China is acting partly out of provocation from the West, but its overall policy shift is to a large extent home-grown.
As with the Winter Olympics, where China tries to separate the athletes from its people, the nation also behaves similarly towards the rest of the world. What should be a celebration of international cooperation is happening at a time when the exact opposite is happening.
Kate Phylaktis, Professor of International Finance and Director, Emerging Markets Group, City, University of London
This article is republished from The Conversation under a Creative Commons license. Read the original article.