Crushed by $300 billion in debt, Evergrande, one of China’s biggest property developers, is sliding toward bankruptcy. This has prompted fears of a wider property crash or even a financial crisis.
But this is hardly the only crisis besieging the government of Xi Jinping. An unexpected electricity shortage threatens to slow down manufacturing. And for the past year, the government has waged a fierce campaign to regulate China’s vibrant internet companies, spurring hundreds of billions of dollars in investor losses.
The common feature of these crises: All were triggered by government policies. In the eyes of Beijing, these policies are meant to fix deep structural problems in the economy and lay more solid foundations for future growth. To many outsiders, they represent a dispiriting retreat from the market-oriented reforms of the past and signal the end of China’s long economic boom. But forecasts of China’s doom are most likely mistaken, as they have so often been.
True, in the latest quarter, economic growth slowed to a crawl, growing by just 0.2 percent compared with the previous quarter. The next several months will be rockier still. Slower growth in China is unwelcome news for a global economy struggling to regain its footing after the disruptions of the Covid-19 pandemic. But over the next few years, China is likely to regain momentum — in part because of the hard work it is doing now.
The biggest immediate worry is the collapse of Evergrande.Like most Chinese property developers, it relies on two key funding sources: deposits paid by home buyers before construction and huge amounts of debt.
Evergrande’s woes result from a government campaign begun last year to force property developers to reduce their liabilities. It is the latest move in a five-year effort to bring the country’s debt under control. According to the Bank for International Settlements, China’s gross debt level, at 290 percent of G.D.P., has doubled since 2008. While that level is comparable with that ofrich countries with well-developed financial systems, it is high for a middle-income country. China’s leaders know that to avoid a financial crisis or avoid a repeat of Japan’s stagnation of the 1990s — the aftermath of a big debt-fueled property bubble — growth in the future must be far less reliant on debt than it has been.
The problem is that by attacking debt in the property sector, regulators risk shutting off a powerful engine that directly or indirectly affects as much as a quarter of China’s economic growth. Problems are spreading beyond Evergrande. Other developers are having trouble repaying their debts. And the sales and construction of new housing are both falling.
The drive to cut real estate debt will almost certainly depress China’s growth in the coming quarters. But it will not lead to a “Lehman moment,” when the implosion of a single heavily indebted company triggers a broader financial or economic collapse: The country has an enormous pool of savings. And the government is now adept at managing meltdowns of major companies, including the private conglomerates HNA and Anbang, Baoshang Bank and Huarong, a huge state-owned asset manager.
The larger question is whether China can maintain a dynamic economy when its government, under Mr. Xi, seems increasingly intent on meddling in the market. The answer: Despite a desire for more state discipline, China has not rejected markets — dynamism will continue.
Some of this state meddling is prudent. The property crackdown is part of a serious drive to cure the economy’s addiction to debt. Similarly, the power shortages that have plagued much of industrial China are due largely to efforts to slash the country’s reliance on coal. China has said that its carbon emissions should peak by 2030 and then decline, with a goal of reaching carbon neutrality by 2060.
One response to the energy shortage has been a long-overdue deregulation of electricity prices. This has allowed generators to pass on some of the impact of higher coal prices to end users. So it is not true that Mr. Xi’s government is implacably anti-market. Beijing, as it has for decades, will continue relying on a combination of state guidance and market forces: The state sets the direction for investment, with day-to-day outcomes dictated by the market.
A more serious concern is the yearlong offensive against privately owned big tech companies, notably e-commerce and the financial technology giant Alibaba, and the ride-hailing company Didi. It’s unclear whether China can ever become a true leader in innovation if it insists on squashing its most successful entrepreneurial businesses.
Yet even here, the story is not black-and-white. The internet crackdown is not really about crushing private enterprise: Private companies in many sectors, including tech hardware, are doing just fine. Rather, the crackdown addresses — in a very authoritarian way — the same anxieties about big tech that governments around the world are grappling with: unaccountable power, monopolistic practices, shoddy consumer protection and the tendency of a tech-heavy economy to drive income inequality.
One final worry is that these moves toward greater state discipline are driven not by economic motives but by Mr. Xi’s desire to reinforce his power, ahead of a Communist Party conference in late 2022 where he expects to gain a third term as the country’s leader. In the long run there is a risk that overly centralized power could degrade the government’s ability to manage the economy. But Mr. Xi also recognizes that his power will not be worth much unless the economy keeps growing.
China will never run its economy in a way that pleases free-market purists. But it has come up with a mixed model that works. And despite the stresses of the moment, it will keep on working.
Arthur Kroeber is a partner and the head of research at Gavekal Dragonomics, a China-focused economic research firm.
The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.
Economists expect inflation reaccelerated to 3.1% in February
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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.
Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.
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Article contentArticle contentCPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.
Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.
Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.
‘Can’t afford missteps’: Desjardins Financial
The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”
They estimated the central bank’s preferred measures of core-trim and core-median inflation are overemphasizing items in the CPI basket of goods whose prices are rising more than five per cent. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.
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Article content“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.
Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and three cuts of 25 basis points for the year.
“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.
‘Inflict too much damage’: National Bank
The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.
“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.
They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.
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Article content“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.
Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.
The trio expect very tepid growth for 2024 of 0.3 per cent.
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Rising gas prices: RBC Economics
Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.
Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).
China’s strong factory output and investment growth at the start of the year raised doubts over how soon policymakers will step up support still needed to boost demand and reach an ambitious growth target.
Industrial output rose 7% in January-February from the same period a year earlier, the National Bureau of Statistics said Monday, the fastest in two years and significantly exceeding estimates. Growth in fixed-asset investment accelerated to 4.2%, strongest since April. Retail sales increased 5.5%, roughly in line with projections.
Official economic data out of China for the January and February period came in better than expected. Industrial output rose 7%, higher than the 5% forecast by economists in a Reuters poll, and sped up from the 6.8% growth in December, according to data published Monday by the National Bureau of Statistics.
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Meanwhile, retail sales grew 5.5%, better than the 5.2% predicted by analysts but slowed from the previous period’s 7.4%.
Still, the country’s troubled real estate sector continues to weigh on the economy: Investment in property development fell 9%. Commercial real estate sales are also down double-digit percentages.
“The national economy maintained the momentum of recovery and growth and got off to a stable start,” the statistics office said in its release. Beijing typically releases combined data for January and February to smooth over distortions caused by the Lunar New Year holidays.
China’s shaky domestic demand
Clouding the strong numbers from Monday’s data release are the persistent signs of weak domestic demand in China. New bank lending in China fell more than expected in February, according to Reuters calculations based on People’s Bank of China data.