China is experiencing a slow-motion economic crisis that could undermine stability in the current regime and have serious negative consequences for the global economy. Despite the many warning signs, Western analysts and policy makers are optimistic that Xi Jinping is up to the task of managing the crisis. Such optimism is misplaced.
The U.S. and its allies have many tools to influence China’s economy and need to weigh the consequences of an acute crisis against the threat its current trajectory poses to the U.S. Policy makers…
China is experiencing a slow-motion economic crisis that could undermine stability in the current regime and have serious negative consequences for the global economy. Despite the many warning signs, Western analysts and policy makers are optimistic that
is up to the task of managing the crisis. Such optimism is misplaced.
The U.S. and its allies have many tools to influence China’s economy and need to weigh the consequences of an acute crisis against the threat its current trajectory poses to the U.S. Policy makers should be thinking of how best to deploy these tools, instead of passively assuming the rapid growth and stability of the Chinese economy will continue.
In December real-estate developers China Evergrande
and Kaisa joined several other overleveraged firms in bankruptcy, exposing hundreds of billions in yuan- and dollar-denominated debt to default. Real estate represents around 30% of the Chinese economy, nearly twice the levels that led to the financial crisis of 2008-09 in the U.S., Spain and England.
The real-estate industry has been key to keeping annual growth above 6%. Yet a debt bubble has inflated by 20% annually between 2014 and 2018. Originally intended to accommodate rapid urbanization for the industrial economy, the urban property market is now overbuilt. Some 90% of urban households own their own properties and enough vacant units are available to accommodate 10 years of urban immigrants. Sales and prices have tumbled this year, and overleveraged builders and creditors are suffering the consequences.
After a major change in how central and local governments divvy up tax revenue in 1994, Chinese local officials began to rely on land sales for the income needed for improving infrastructure and social welfare. At a minimum, one-third of local government revenues is derived from land sales. Another 10% to 15% come from related taxes on development.
But land sales fell by more than 30% in late 2021, putting local finances in jeopardy. Local governments have struggled to address other priorities such as healthcare, pensions, environmental cleanup, income inequality and education. Moreover, up to 80% of household wealth in China is in real estate holdings, a hedge against weakness of the social safety net. In other words, an economic meltdown is a potential threat to the implicit social compact in China between authoritarian rulers and a quiescent population.
In his zeal to reassert the dominance of the Chinese Communist Party, Mr. Xi has engineered a crackdown on some of China’s most innovative industries and the entrepreneurs building them. The party channels credit to state-owned enterprises to the detriment of the more dynamic and job-creating private industry, inserts operatives on the management committees of most enterprises, and disciplines business leaders perceived to resist Mr. Xi’s leadership. The clampdown on new industries such as ride-sharing, private education, social media and online and private healthcare, is especially damaging to growth.
Mr. Xi is privileging the less productive and less innovative components of the Chinese economy while enhancing control, limiting financing and punishing entrepreneurial leaders in many leading industries. This isn’t a recipe for maintaining strong economic growth. Despite the frequent assertions that China is catching up or moving ahead of the West in technology industries, it has a long way to go to achieve the self-sufficiency and global leadership it seeks. U.S. sanctions on advanced semiconductors, for instance, have gutted Huawei’s ability to make its own 5G phones. China’s semiconductor industry is 10 years behind world leaders, according to a recent German study.
China’s commercial aviation industry doesn’t have an internationally certified jet to compete with Boeing
despite three decades of concentrated efforts. Its biopharmaceutical industry failed to produce an effective vaccine for Covid. Steel, batteries and high-speed rail—where China is competitive—are at risk of trade retaliation due to environmentally harmful production practices and theft of intellectual property. China’s alleged lead in artificial intelligence could be blunted by imposing the same limits on data flows into China that it imposes internally, thus sapping its monopoly on big data, and by limiting U.S. investment in Chinese AI firms.
China’s overall productivity levels also lag those of other advanced economies. Mr. Xi’s turn to state-owned enterprises and manufacturing certainly won’t improve this relative weakness.
In short, it is difficult to escape the conclusion that China’s economy is systematically weakening and that Mr. Xi’s new priorities offer little hope for a quick turnaround. The U.S. and its allies could further compound Mr. Xi’s challenges by vigorous enforcement of trade laws, limiting Chinese access to technology and financing from the West, and imposing sanctions against China’s brutal human-rights abuses in Xinjiang and in countries in the developing world that it is trying to exploit through its Belt and Road Initiative. A good example of such exploitation is the atrocious mining conditions for key battery components cobalt and lithium in Africa and South America.
A major slowdown or acute financial crisis in China would certainly have a negative impact on the global economy. But U.S. and allied policy makers do have tools that could both influence the direction of the Chinese economy and help repair some of the accumulated damage to their economies from Chinese mercantilism. A first step is to undermine the narrative of a relentless, unstoppable economic advance under Mr. Xi’s leadership.
BEIJING — China will be able to achieve economic growth of around 5.5% in 2022, an adviser to the government’s cabinet said on Friday, making a rosier prediction than markets expect as recent data have pointed to slowing momentum.
The world’s second-largest economy cooled over the course of last year and faces multiple headwinds as a property downturn hurts investment and China’s efforts to contain local cases of the highly contagious Omicron variant of COVID-19 weigh on consumption.
That has prompted policymakers to roll out an array of support measures, including Friday’s cut by the central bank in the rate on standing lending facility (SLF) loans by 10 basis points, a day after it cut benchmark lending rates.
Friday’s comments by Zhu Guangyao, a former vice finance minister, are more optimistic than those from private economists.
A Reuters poll of analysts published on Jan. 13 forecast China’s economy would grow 5.2% in 2022.
The government will unveil a growth target for 2022 at the opening of the annual parliament meeting in early March.
“I’m confident that China’s economic growth will be around 5.5% in 2022,” Zhu told a media briefing, adding that the potential economic growth rate was estimated at 5-6%.
Li Yang, former vice president of the Chinese Academy of Social Sciences, a top government think tank, said China has policy space to support the economy.
China was restrained on monetary policy and fiscal policy in 2021, leaving some space for this year, Li said during the same event on Friday hosted by China’s State Council Information Office.
On Thursday, Premier Li Keqiang said China will take more “practical and concrete measures” to boost effective demand and stabilize market expectations, state media reported.
China’s cabinet has pledged to speed the issuance of local government special bonds to boost investment, while the finance ministry has issued 1.46 trillion yuan ($230.26 billion)in the 2022 advance quota for local special bonds.
Chinese policymakers, however, have ruled out “flood-like” stimulus for fear of reigniting debt and property risks.
China’s economy expanded 8.1% in 2021, the fastest in a decade due partly to the low base from 2020 when COVID-19 jolted the economy, comfortably beating an official target of “above 6%.”
Last year, Chinese policymakers focused on curbing property and debt risks, exacerbating the slowdown, but have eased back somewhat so as not to fuel job losses ahead of a key Communist Party Congress late this year.
Zhu also said that expected interest rate hikes by the U.S. Federal Reserve could have a big market impact, Zhu said, and said that the United States should strengthen its policy coordination with emerging economies, including China.
“We hope the United States could change the idea that ‘the dollar is our currency, but your problem’, and truly strengthen its policy coordination with other countries, especially developing countries and emerging market countries,” Zhu said.
Li said the expected Fed tightening could trigger capital outflows from developing countries, with some already feeling the pressure.
The impact on China’s economy will be contained by its controls on capital flows and a managed-float yuan exchange rate, Li added.
Economists polled by Reuters expect the Fed to raise its key interest rate three times this year, tightening policy at a much faster pace than thought a month ago to tame persistently high inflation.
($1 = 6.3406 Chinese yuan renminbi) (Reporting by Kevin Yao; Editing by Raissa Kasolowsky and Louise Heavens)
President Joe Biden is paying a steep price for high inflation — a problem that festered during his first year in office instead of fading away as he suggested it would.
His $1.9 trillion coronavirus relief package, enacted in March, drove what will probably be the fastest economic growth since 1984 and pulled the unemployment rate down to 3.9% at a quicker pace than experts predicted.
But after unprecedented government interventions and supply chain problems, inflation is running at a nearly 40-year high of 7%. And that has soured Americans’ feelings about the president. It’s left Biden trying to retrofit a policy agenda about winning the future into one that can fix inflation, a problem that did not exist when he took office.
The mix of a strong economy and high inflation has created a paradox for his presidency: Most U.S. households feel confident about their own finances, yet they’re worried about the state of the national economy in ways that have been a drag on Biden’s popularity.
“We need to get inflation under control,” Biden acknowledged at a news conference Wednesday wrapping up his first year. He allowed that “it’s going to be painful for a lot of people in the meantime.”
There is a clear contradiction in people believing that they’re doing well but that the economy is doing poorly. White House officials are now trying to reconcile this paradox, as Biden’s future may depend on making people feel good about not just their bank accounts but also the broader economy.
Metrics like Langer Associates’ Consumer Comfort Index encapsulate the problem. It shows a worsening gap between people’s optimism about their own situations and their pessimism about the national economy and the climate for buying goods.
A December poll from the AP-NORC Center for Public Affairs Research found that just 35% of Americans described the national economy as good, down from 45% in September. The percentage calling their personal financial situation good — 64% — has barely budged in AP-NORC polling since before the pandemic.
And an AP-NORC poll this month found that a mere 37% of Americans approve of Biden’s economic leadership, a sign that they’re blaming him for overall economic conditions and not crediting him for their personal circumstances.
The White House view is that families recognize their own economic circumstances have improved, but there’s this sense that everything else in society is not working. They point to the decrease in institutional trust and political polarization as a possible explanation for this trend.
Republicans have used inflation to hammer Biden, while West Virginia Sen. Joe Manchin, a Democrat in a GOP state, has refused to back the president’s $2 trillion tax and social programs agenda because of inflation concerns, leaving the president trying to pass a scaled-down version.
Renewing positive public sentiment, the White House believes, could hinge on whether inflation eases.
The Federal Reserve expects that inflation rates will fall in the second half of this year as it raises interest rates, though inflation would still be above the Fed’s 2% annual target. The White House is pinning its hopes on the idea that the direction of inflation tends to matter more to voters when prices are elevated, which suggests that Biden could benefit if prices stabilize and people put a greater emphasis on their own wellbeing.
The administration has noted that inflation is a global problem, though it also speaks to the blowback from an unprecedented amount of government aid to the U.S. economy. Prominent economists such as Larry Summers, a former U.S. treasury secretary, and Olivier Blanchard, former chief economist at the International Monetary Fund, warned early on that the coronavirus relief package was so large that it would fuel higher inflation. And Summers said inflation could make it harder for Biden to achieve the rest of his agenda, a prediction that anticipated his recent legislative struggles.
The administration responded at the time that it was not dismissive of inflation, but was balancing the risks of higher inflation against a slow economic recovery from the pandemic.
“We’ve constantly argued that the risks of doing too little are far greater than the risk of going big, providing families and businesses with the relief they need to finally put this virus behind us,” Jared Bernstein, a White House economist, said at a February 2021 briefing. “This is risk management.”
Shortly after the relief package became law, a Chicago Fed analysis in April suggested that inflation could run high if there were “resource pressures” — a statement that became prophetic as ships waited to dock, overseas factories shut because of the pandemic and demand outstripped the world’s ability to supply goods.
The president signed an executive order on Feb. 24 to bolster supply chains, but it was aimed at implementing a longer term series of repairs rather than addressing immediate needs. Biden didn’t mention inflation in his remarks. Prices at the time were increasing at an annual rate of just 1.7%. Yet Biden referred to an old story about how a single break in the supply chain could bring down an entire country.
“Remember that old proverb: ‘For want of a nail, the shoe was lost. For want of a shoe, the horse was lost,’” he said. “And it goes on and on until the kingdom was lost, all for the want of a horseshoe nail. Even small failures at one point in the supply chain can cause outside impacts further up the chain.”
That scenario unfolded in the months after Biden signed his March relief package.
The computer chip shortage was already hurting the auto sector. But shortages emerged for household appliances, furniture, towels, clothing and a whole range of basic goods. Products that once shipped in hours took weeks or months to arrive.
Inflation wasn’t bad enough to lose a kingdom, just to undermine public trust in Biden at the precise moment when other data showed that his relief package had succeeded at bringing back jobs.
Yet Biden called the inflation fleeting, saying the bottlenecks and high prices would vanish as the economy regained its footing after being shut down because of the pandemic.
“These disruptions are temporary,” Biden said in a July 19 speech. The spikes in prices for autos, lumber, airline tickets and other items were the result of “transitory effects” that accounted for the bulk of inflation, he explained.
Annual inflation was at 5.4% by then. And the figure got worse toward the end of the year as oil prices rose and the impact of higher housing costs began to filter into inflation. The administration brokered an agreement for the Port of Los Angeles to operate all hours of all days of the week to relieve shipping congestion. It launched initiatives to increase the number of truckers and worked with retail CEOs to ensure Christmas gifts arrived.
Summers, the original inflation Cassandra of the Biden era, rejected supply chain bottlenecks as the primary driver of inflation.
He told the American Economics Association this month that Fed policy is too loose and the labor market is historically tight, a sign that Biden might be the victim of his own success in bringing jobs back as quickly as he did.
“We are running the economy in an unsustainable way,” Summers said.
EDITOR’S NOTE — Josh Boak covers the White House and has written about the U.S. economy for AP since 2013.
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