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Can China Avoid A Significant 2022 Economic Downturn?

Op-Ed Commentary by Chris Devonshire-Ellis – October 25th, 2021

China’s economy is slowing dramatically with annual GDP growth of 4.9% in Q3 and yearly industrial growth of 3.1%, both well below expectations and continuing a trend decline in these respective rates of growth. Annual inflation is weak at 0.8%, and getting weaker, reflecting falling household demand. By contrast, producer price inflation at record highs of 10.7%, is biting into household disposable income. Given these trends, unless China’s government undertakes a reflationary boost of its economy through a short term expansionary fiscal program, its economy faces a prolonged, and maybe sharper than expected downturn.

On a positive note, since beginning of 2021, growth has been overwhelmingly supported by the private demand side of the economy. Consumption has accounted for about 65% of that growth, including extremely high rates of retail spending over first nine months. Net exports also contributed 20% to 2021 growth, which is historically high due to strong global demand. However, government investment has been extremely low by historic standards, contributing only 11% to 2021 GDP growth. For the first time in any year, even private business investment has seen stronger growth than its public counterpart over 2021 – in spite of intensifying government regulation of large private corporations and certain sectors, such as private tuition.

As private demand falters, though, due to the slumping property market, energy shortages, supply chain disruptions and high producer prices eating into households’ disposable incomes, the Chinese government needs to consider rebalancing the economy towards more public spending. It has the capacity to do so given central government debt to GDP is only 68%, while the budget deficit is only -4%. Contrast this to other economies for the same respective measures: US (108% / -15%), Eurozone (98% / -7.3%) and Japan (266% / -12.6%).

While Beijing has undertaken all the right policy measures in rebalancing to a more services and private consumption driven economy, over most of 2021, it needs to take account of significantly weakening economic conditions, before they spiral out of control. Previous actions however have seen that Beijing usually gets it right – unless serious external problems out of its control manifest themselves. The key to China’s economy remains the United States and European Union.

For instance, the US alone accounts for two-thirds of China’s record trade surplus with the world this year and will probably account for the same in 2022.

However, the ratcheting up of political tensions, especially over Taiwan, may potentially dislodge this. It cannot go unnoticed that both the US and EU appear to be intensifying political pressure, in parallel, on Beijing. On the same day as Biden says the US could come to Taiwan’s aid if attacked by China (although that statement was later somewhat reversed by the Whitehouse), the EU issued a report by the European Parliament in support of direct economic integration with Taiwan, yet supposedly within the umbrella of the EU’s overall One China Policy. In response to that report, China’s diplomatic mission to Brussels issued a stern warning over the dangers of the EU misinterpreting the One China Policy.

These episodes highlight an irreversible intertwining of the West’s economic policy with geopolitical strategy. It cannot be wholly dismissed with the belief the world is returning to the old normal of absolute primacy being accorded to economic relations as the sole determinant of the West’s ties with China.

Globalisation has entered turbulent and uncharted waters. The lessons of history involving the relative rise of one great power alongside the relative decline of another, need to be studied, understood and intricately applied in today’s much more complex setting to navigate the stormy seas to come.

Disclaimer

Any views or opinions represented in this blog are personal commentary, belong solely to the contributor and do not necessarily represent the views of Asia Briefing Limited or Dezan Shira & Associates.

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