JACK MA, THE founder of China’s giant e-commerce platform, Alibaba, started his first web company after a visit to America in 1995. Cao Dewang, the boss of Fuyao Glass, a Chinese company made famous by the documentary “American Factory”, ventured into manufacturing after a trip to the Ford Motor Museum in Michigan. (The museum’s significance struck him only on the plane home, he told an interviewer, so he immediately booked a return flight to make a second visit.)
Travel is vital to innovation. Unfortunately what is true of business is also true of viruses. At some point on its journey around the globe the covid-19 virus re invented itself. The new Omicron variant will further entrench China’s tight restrictions on business travel. Indeed it may cause more disruption to China’s economy than to other GDP heavyweights. That is not because the virus will spread more widely in China. On the contrary. It is because the government will try so hard to stop it from doing so.
Since the end of May, China has recorded 7,728 covid-19 infections. America has recorded 15.2m. And yet China’s curbs on movement and gathering have been tighter, especially near outbreaks (see chart 1). Its policy of “zero tolerance” towards covid-19 also entails limited tolerance for international travel. It requires visitors to endure a quarantine of at least 14 days in an assigned hotel. The number of mainlanders crossing the border has dropped by 99%, according to Wind, a data provider.
These restrictions have stopped previous variants from spreading. But periodic local lockdowns have also depressed consumption, especially of services like catering. And the restrictions on cross-border travel will inflict unseen damage on innovation. Cutting business-travel spending in half is as bad for a country’s productivity as cutting R&D spending by a quarter, according to one study by Mariacristina Piva of the Università Cattolica del Sacro Cuore in Milan and her co-authors.
If the Omicron variant is more infectious than other strains, it will increase the likelihood of covid-19 outbreaks in China, leading to more frequent lockdowns. If the restrictions were as severe as those China briefly imposed in mid-August, when it was fighting an outbreak that began in the city of Nanjing, the toll on growth could be considerable. If imposed for an entire quarter, the curbs could subtract almost $130bn from China’s GDP, according to our calculations based on a model of lockdowns by Goldman Sachs, a bank—equivalent to around 3% of quarterly output.
Omicron is not the only threat to China’s economy. Even before its emergence, most forecasters thought that China’s growth would slow to 4.5-5.5% next year, as a crackdown on private business and a property slowdown bite.
Worse scenarios are imaginable. If China suffers a property slump as bad as the one it endured in 2014-15, GDP growth could fall to 3% in the fourth quarter of 2022, compared with a year earlier, according to Oxford Economics, a consultancy. That would drag growth for the whole year down to 3.8%. If housing investment instead crashed as badly as it did in America or Spain in the second half of the 2000s, growth in China could fall to 1% in the final quarter of 2022 (see chart 2). That would take growth for the year down to 2.1%. Losses would leave “numerous” smaller banks with less capital than the regulatory minimum of 10.5%, the firm says.
Neither of these scenarios is inevitable. Oxford Economics rates the probability of a repeat of 2014-15 as “medium” not high. (China’s inventory of unsold properties, it points out, is lower now than it was seven years ago.) It thinks the chances of a repeat of an American or a Spanish-style disaster are low. Both the scenarios assume that China’s policymakers would respond only by easing monetary policy. But a more forceful reaction seems likely. Although the authorities’ “pain threshold” has increased, meaning they do not intervene as quickly to shore up growth, they still have their limits. “I don’t think the Chinese government is dogmatic. It is quite pragmatic,” says Tao Wang of UBS, a bank.
Thus far, the property sector’s pain has been masked by the strength of other parts of the economy. Exports have contributed about 40% of China’s growth so far this year, points out Ting Lu of Nomura, another bank, as China provided the stay-at-home goods the world craved. If the new variant sends people back into their bunkers, China’s exporters may enjoy a second wind. More likely, export growth will slow, perhaps sharply. Mr Lu thinks exports will be flat, in price-adjusted terms, next year, contributing nothing to China’s growth. The economy will therefore need other sources of help.
The most attractive stimulus options bypass the bloated property sector, which already commands too big a share of China’s GDP. The government could, for example, cut taxes on households, improve the social safety-net and even hand out consumption vouchers. The problem is that consumers may be slow to respond, especially if their homes are losing value. Not even China’s government can force households to spend.
A more reliable option is public investment in decarbonisation and so-called “new” infrastructure, such as charging stations for electric vehicles and 5 G networks. The difficulty, however, is that these sectors are too small to offset a serious downturn in the property market, as Goldman Sachs points out.
The government will thus try to stop the property downturn becoming too serious. Analysts at Citigroup, another bank, expect that China’s policymakers will prevent the level of property investment from falling in 2022. That will allow GDP to expand by 4.7%. To accomplish this, the analysts reckon, China’s central bank will have to cut banks’ reserve requirements by half a percentage point and interest rates by a quarter-point early next year. The central government will need to ease its fiscal stance and allow local governments to issue more “special” bonds, which are repaid through project revenues.
It will also require more direct efforts to “stabilise”, if not “stimulate”, the property market. The government will need to make it easier for homebuyers to obtain mortgages and ease limits on the share of property loans permitted in banks’ loan books. Citi’s economists think the authorities may even show some “temporary forbearance” in enforcing their formidable “three red lines”, the most prominent set of limits on borrowing by property developers, which cap developers’ liabilities relative to their equity, assets and cash.
The one set of curbs China seems quite unwilling to ease are the covid-19 restrictions on international travel. They will probably remain in place until after the Winter Olympics in February and the Communist Party’s national congress later next year. They may remain until China’s population is vaccinated with a more effective jab, perhaps one of the country’s own invention. (The authorities have been unconscionably slow in approving the vaccine developed by BioNTech and Pfizer.) The government may also want to build more hospitals to cope with severe cases. Before covid-19 the country had only 3.6 critical-care beds per 100,000 people. Singapore has three times as many.
Businesspeople in Shanghai have started talking about travel restrictions persisting until 2024. The virus is highly mutable. China’s policy towards it, however, is strikingly invariant. ■
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This article appeared in the Finance & economics section of the print edition under the headline “Omicronomics”
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Odds are split on whether or not the Bank of Canada will hike rates for the first time since 2018 on Wednesday, with Omicron’s wrath seen potentially delaying the start of an aggressive tightening campaign geared at taming red-hot inflation.
Canada’s central bank will make its first major policy decision of 2022 at a time when consumer prices are rising at their fastest clip in 30 years and a harsh Omicron-fueled wave of coronavirus infections is just beginning to ebb.
Money markets see a roughly 65% chance the Bank will boost the overnight rate to 0.5% from the current record low 0.25%. Analysts surveyed by Reuters are less certain, with 77% seeing the central bank holding until at least March. [BOCWATCH]
“It’s a toss up really,” said Stephen Brown, senior Canada economist at Capital Economics. “I mean, (the BoC) was clear it was getting more concerned about inflation. But in terms of the type of hints that a central bank might normally send when it’s about to hike, we haven’t quite had them.”
Regardless of when the first increase comes, it is nearly certain to be the first of many this year. Brown sees four hikes in 2022, up to 1.25%. Money markets, meanwhile, are pricing in six to 1.75% to quell spiraling price gains on everything from housing to new appliances. [BOCWATCH]
Canada’s inflation rate hit 4.8% in December, the highest since September 1991 and the ninth month in a row above the Bank of Canada’s 1-3% control range. Inflation has not been this high for this long since the central bank set its 2% target in 1991.
The BoC renewed that target in December. Two days later, Governor Tiff Macklem said the slack in Canada’s economy was “substantially diminished” and the Bank was “not comfortable” with the current path of inflation.
That was a clear signal a tightening was imminent, said Derek Holt, head of capital markets economics at Scotiabank, further bolstered by new survey data showing inflation expectations continue to mount for consumers and businesses.
“At this point in the cycle, the risks to choosing the wrong fork in the road are exceptionally high,” said Holt, who expects multiple hikes this year to get the benchmark to 2%.
“Tighten too much and the curve inverts and the economy tanks. Don’t tighten enough and the economy eventually tanks on rising imbalances anyway given the dangerous combination of runaway inflation and house prices,” he said.
But the potential wrinkle is the Omicron variant. Canada has seen a huge surge in daily cases, outstripping testing capacity and forcing provinces to reimpose restrictions, which is set to weigh on January job data.
Still, for some Bank watchers the risk is overblown.
“Omicron is the obvious get out of jail free card for monetary policymakers,” said Simon Harvey, head of FX analysis for Monex Europe and Monex Canada.
“Near-term growth risks don’t offset the need to combat rising inflationary pressures, especially if they’re accompanied with downside risks to potential growth.”
The U.S. Federal Reserve also meets on Wednesday and investors expect it to signal a first rate hike in March.
(Reporting by Julie Gordon in Ottawa; Editing by Chizu Nomiyama)
The price of oil hasn’t even reached US$100 a barrel, but that’s not stopped economists at JPMorgan Chase & Co. from war-gaming what a surge to US$150 — this quarter — would mean for the world economy.
In a report published Friday, economists including Joseph Lupton and Bruce Kasman warned that such a shock would be enough to reduce global growth by more than three quarters, to around 0.9 per cent in the first half of the year — versus the 4.1 per cent they currently forecast.
Inflation at the worldwide level would also more than double, to 7.2 per cent rather than the projected 3 per cent, in the bank’s scenario. That could potentially force central banks to constrain monetary policy even faster than they now intend, the analysts said.
“Oil shocks have a long history of driving cyclical downturns,” they wrote. “The latest geopolitical tensions between Russia and Ukraine raise the risk of a material spike this quarter.”
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