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”
A LITTLE MORE than a year after the first success of a covid-19 vaccine in a clinical trial, a sense of dread has struck much of the world. The Omicron variant of the coronavirus, first publicly identified on November 24th, may be able to circumvent the defences built up by vaccination or infection with covid-19. The World Health Organisation declared that Omicron poses a “very high” global risk. The boss of Moderna, a vaccine-maker, warned that existing jabs may struggle against the heavily mutated new variant. Faced with the ghastly prospect of yet more lockdowns, closed borders and nervous consumers, investors have reacted by selling shares in airlines and hotel chains. The price of oil has slumped by roughly $10 a barrel, the kind of drop often associated with a looming recession.
As we explain this week it is too early to say whether the 35 mutations on Omicron’s spike protein help make it more infectious or lethal than the dominant Delta strain. As scientists analyse the data in the coming weeks, the epidemiological picture will become clearer. But the threat of a wave of illness spreading from one country to the next is once again hanging over the world economy, amplifying three existing dangers.
The first is that tighter restrictions in the rich world will damage growth. On the news of the variant, countries scrambled to block travellers from southern Africa, where it was first identified. Israel and Japan have closed their borders entirely. Britain has imposed new quarantine requirements. The pandemic abruptly ended a freewheeling era of global travel. Restrictions were being eased this year, but the past week has shown that gates are slammed shut much faster than they are opened.
The spread of Omicron is also likely to intensify limits on free movement at home. Europe was curbing many domestic activities even before the variant arrived, in order to fight surging infections of Delta. Italy is keeping most of the unvaccinated out of indoor restaurants, Portugal requires even those who are vaccinated to have a negative test to enter a bar and Austria is in full lockdown. The long-awaited recovery of the rich world’s huge service industries, from hospitality to conferences, has just been postponed.
A lopsided economy fuels the second danger, that the variant could raise already-high inflation. This risk looms largest in America, where President Joe Biden’s excessive fiscal stimulus has overheated the economy and consumer prices rose by 6.2% in October compared with the previous year, a three-decade high. But inflation is also uncomfortably high elsewhere, at 5.3% globally, according to Bloomberg data.
You might think Omicron would lower inflation, by depressing economic activity. In fact it could do the opposite. Prices are rising in part because consumers are bingeing on goods, bunging up the world’s supply chains for everything from Christmas lights to trainers. The cost of shipping a container from the factories of Asia to America remains extraordinarily high. For overall inflation to recede, consumers need to shift spending back towards services like tourism and eating out. Omicron may delay this. The variant could also trigger more lockdowns in key manufacturing nodes such as Vietnam and Malaysia, aggravating supply glitches. And cautious workers may put off their return to the labour force, pushing up wages.
That may be one reason why Jerome Powell, the chairman of the Federal Reserve, indicated on November 30th that he favours monetary tightening. That stance is right, but brings its own dangers. The spillover effects could hurt emerging economies, which tend to suffer capital outflows and falling exchange rates when the Fed tightens.
Emerging economies have greater reserves and depend less on foreign-currency debt than they did during the Fed’s botched attempt to unwind stimulus during the taper-tantrum of 2013. Yet they must also cope with Omicron at home. Brazil, Mexico and Russia have already raised interest rates, which helps stave off inflation but may reduce growth just as another wave of infections looms. Turkey has done the opposite, cutting rates, and faces a collapsing currency as a result. More emerging economies could confront an unenviable choice.
The final danger is the least well appreciated: a slowdown in China, the world’s second-biggest economy. Not long ago it was a shining example of economic resilience against the pandemic. But today it is grappling with a debt crisis in its vast property industry, ideological campaigns against private businesses, and an unsustainable “zero-covid” policy that keeps the country isolated and submits it to draconian local lockdowns whenever cases emerge. Even as the government considers stimulating the economy, growth has dropped to about 5%. Barring the brief shock when the pandemic began, that is the lowest for about 30 years.
If Omicron turns out to be more transmissible than the earlier Delta variant, it will make China’s strategy more difficult. Since this strain travels more easily, China will have to come down even harder on each outbreak in order to eradicate it, hurting growth and disrupting supply chains. Omicron may also make China’s exit from its zero-covid policy even trickier, because the wave of infections that will inevitably result from letting the virus rip could be larger, straining the economy and the health-care system. That is especially true given China’s low levels of infection-induced immunity and questions over how well its vaccines work.
Vexing variants and worrying weeks
It is not all gloom. The world will not see a re-run of the spring of 2020, with jaw-dropping drops in GDP. People, firms and governments have adapted to the virus, meaning that the link between GDP and restrictions on movement and behaviour is one-third of what it was, says Goldman Sachs. Some vaccine-makers expect fresh data to show that today’s jabs will still prevent the most severe cases of the disease. And, if they must, firms and governments will be able to roll out new vaccines and drugs some months into 2022. Even so Omicron—or, in the future, Pi, Rho or Sigma—threatens to lower growth and raise inflation. The world has just received a rude reminder that the virus’s path to becoming an endemic disease will not be smooth. ■
This article appeared in the Leaders section of the print edition under the headline “Danger ahead”
Nureddin Nebati takes on the role of finance minister after Lutfi Elvan resigns.
Turkish President Recep Tayyip Erdogan has replaced the country’s finance minister after weeks of economic turmoil in which inflation soared as the lira plummeted to record lows.
The currency has lost more than 40 percent of its value against the US dollar this year, making it the worst-performing of all emerging market currencies.
According to a presidential decree issued near midnight on Wednesday, Erdogan accepted the resignation of Lutfi Elvan and appointed his deputy, Nureddin Nebati, as the new finance minister.
Nebati, 57, has a bachelor’s degree in public administration and a master’s degree in social sciences from Istanbul University. He also holds a doctoral degree in political science and public administration from Turkey’s Kocaeli University.
His predecessor had only been in the role since November 2020, when he was appointed after the resignation of Erdogan’s son-in-law, Berat Albayrak.
Elvan’s year-long tenure was marked by numerous crises.
Earlier on Wednesday, the Turkish Central Bank intervened in markets to prop up the nosediving lira, which has lost nearly 30 percent in value against the dollar in just a month.
Under pressure from Erdogan, Turkey’s officially independent central bank lowered its key interest rate in November for the third time in less than two months. It did so despite inflation approaching 20 percent – four times the government’s target.
Erdogan believes that high interest rates cause high inflation – the exact opposite of conventional economic thinking – and has insisted he would keep rates low.
Turkey’s currency hit yet another record low of more than 14 to the dollar before recouping some losses on Wednesday after a central bank move to sell reserves. One dollar bought 13.22 lira as of Wednesday afternoon.
The recovery, however, was short-lived after Erdogan appeared again to defend his “new economic model” against the “malice of interest”.
Since 2019, Erdogan has sacked three central bank governors who opposed his desire for lower interest rates. The president, who has blamed the lira’s troubles on foreigners sabotaging Turkey’s economy and on their supporters in the country, believes lower rates will fight inflation, boost economic growth, power exports and create jobs.
On Tuesday, figures showed Turkey’s economy had grown by 7.4 percent in the third quarter, compared with a year earlier, but some analysts believe the surge could be short-lived due to the high inflation and currency meltdown.
Meanwhile, public discontent appears to be on the rise.
Last week, demonstrators protested economic policies in the largest city of Istanbul and the capital, Ankara, while the main opposition Republican People’s Party plans a rally for early elections on Saturday in the southern city of Mersin.
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