Economy
Why China is unlikely to rescue the world economy again
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As the rest of the world teeters on the brink of recession, the last thing Western policymakers want is for China, the biggest driver of global economic growth since the 2008 financial crisis, to have a lopsided recovery. But that is what is unfolding.
After abandoning its thee-year zero-COVID policy in December, the world’s second-largest economy isn’t exactly firing on all cylinders.
China’s imports contracted sharply in April by 7.9%, while exports grew at a slower pace of 8.5% compared to 14.8% in March. Consumer prices rose at the slowest pace in more than two years in April, while factory gate deflation — prices offered by China’s industrial wholesalers — deepened.
Meanwhile, new bank loans tumbled far more sharply than expected in April, with lenders extending 718.8 billion yuan ($104 billion/€94.5 billion) in new yuan loans in the month, less than a fifth of March’s tally.
Is China’s golden era over?
“China’s economy is not about to implode but it is not roaring back to the golden decade of the 2010s when it grew at a double-digit level,” Steve Tsang, director of the China Institute at the London-based School of Oriental and African Studies, told DW.
A strong rebound from China would help offset an expected slowdown in other parts of the world, spurred by monetary tightening policies by central banks over the past 12-18 months.
China’s huge stimulus after the 2008/09 financial crisis helped the global economy recover, partly due to the Asian country’s insatiable appetite for imported raw materials for infrastructure projects.
But those past stimulus measures have left China mired in a mountain of debt. In March, the International Monetary Fund warned that Chinese local government debt alone has risen to a record 66 trillion yuan, equivalent to half the country’s GDP.
Tsang said those Western policymakers praying for China to revive their economies now will need to “look at the new political and economic realities without tainted glasses.”
Taiwan threat leaves China isolated
China’s threat to invade Taiwan, which Beijing claims as its own island, continues to antagonize the West. Beijing’s friendly ties with Moscow and neutrality over Russia’s invasion of Ukraine are other contentious issues that have put global economic collaboration at risk.
“In terms of Taiwan, rising tensions or war would lead to a seismic shift,” Pushan Dutt, professor of economics at INSEAD business school in Singapore, told DW. “Multinational companies would exit China, its export markets will get closed off and sanctions will be put in place.”
Trump-era trade tensions between Beijing and Washington have also persisted through US President Joe Biden’s administration. Tit-for-tat tariffs led to US sanctions on several Chinese companies and officials. Washington has even restricted China’s access to its semiconductor and artificial intelligence (AI) technology on national security grounds.
“The assertive foreign policy that Chinese President Xi Jinping has imposed caused the US and other Western countries to start to decouple or de-risk in their economic links with China, meaning that a key factor that had previously supported rapid growth in China is weakening,” noted Tsang.
Western policymakers are increasingly seeing China’s Belt and Road Initiative as a threat to their interests. Often dubbed the New Silk Road, the initiative is an $840 billion (€771 billion) investment in roads, bridges, ports and hospitals in more than 150 nations. Concerns are growing that the project has lured developing countries into debt traps with huge, unaffordable loans while weakening their ties with Western countries.
Last month, European Central Bank President Christine Lagarde also lamented the possible fragmentation of the global economy into rival blocs led by China and the US, warning it would harm growth and increase inflation.
Beijing prioritizes ‘quality growth’
Another’s reason for China’s less-than-stellar recovery is Beijing’s strategic plan to move the economy up the value chain, prioritizing quality rather than quantity of growth. These reforms, however, take time.
“China has been trying to engineer a shift from being a low-end manufacturer to becoming dominant in the industries of the future (artificial intelligence, robotics, semiconductors, etc.),” said Dutt.
As it moves away from heavy industries dominated by state-owned companies toward innovation and domestic consumption, a slowdown in growth is a “natural corollary,” he added.
Xi holding economy back
Tsang told DW that while Xi clearly wanted the Chinese economy to become more dynamic, vibrant, strong and innovative, “his policies often deliver the opposite effect.”
“With Xi tightening his hold on power and not admitting to mistakes, it is practically impossible for technocrats in China to make the necessary adjustments to revitalize the economy,” Tsang added.
At the same time, the IMF has predicted that China will continue to be the largest driver of global economic growth over the next five years, contributing some 22.6% of total world growth, compared with just 11.3% for the United States.
While slowing Western demand will continue to negatively impact Chinese exports, the domestic economy still has plenty to cheer about, especially due to the pent-up demand from three years of COVID lockdowns.
“Chinese consumers have accumulated $2.6 trillion of excess savings during the pandemic, Dutt told DW. “So expect the services sector to pick up the slack in the short term.”
Edited by: Uwe Hessler
Economy
Biden's Hot Economy Stokes Currency Fears for the Rest of World – Bloomberg
As Joe Biden this week hailed America’s booming economy as the strongest in the world during a reelection campaign tour of battleground-state Pennsylvania, global finance chiefs convening in Washington had a different message: cool it.
The push-back from central bank governors and finance ministers gathering for the International Monetary Fund-World Bank spring meetings highlight how the sting from a surging US economy — manifested through high interest rates and a strong dollar — is ricocheting around the world by forcing other currencies lower and complicating plans to bring down borrowing costs.
Economy
Opinion: Higher capital gains taxes won't work as claimed, but will harm the economy – The Globe and Mail
Alex Whalen and Jake Fuss are analysts at the Fraser Institute.
Amid a federal budget riddled with red ink and tax hikes, the Trudeau government has increased capital gains taxes. The move will be disastrous for Canada’s growth prospects and its already-lagging investment climate, and to make matters worse, research suggests it won’t work as planned.
Currently, individuals and businesses who sell a capital asset in Canada incur capital gains taxes at a 50-per-cent inclusion rate, which means that 50 per cent of the gain in the asset’s value is subject to taxation at the individual or business’s marginal tax rate. The Trudeau government is raising this inclusion rate to 66.6 per cent for all businesses, trusts and individuals with capital gains over $250,000.
The problems with hiking capital gains taxes are numerous.
First, capital gains are taxed on a “realization” basis, which means the investor does not incur capital gains taxes until the asset is sold. According to empirical evidence, this creates a “lock-in” effect where investors have an incentive to keep their capital invested in a particular asset when they might otherwise sell.
For example, investors may delay selling capital assets because they anticipate a change in government and a reversal back to the previous inclusion rate. This means the Trudeau government is likely overestimating the potential revenue gains from its capital gains tax hike, given that individual investors will adjust the timing of their asset sales in response to the tax hike.
Second, the lock-in effect creates a drag on economic growth as it incentivizes investors to hold off selling their assets when they otherwise might, preventing capital from being deployed to its most productive use and therefore reducing growth.
Budget’s capital gains tax changes divide the small business community
And Canada’s growth prospects and investment climate have both been in decline. Canada currently faces the lowest growth prospects among all OECD countries in terms of GDP per person. Further, between 2014 and 2021, business investment (adjusted for inflation) in Canada declined by $43.7-billion. Hiking taxes on capital will make both pressing issues worse.
Contrary to the government’s framing – that this move only affects the wealthy – lagging business investment and slow growth affect all Canadians through lower incomes and living standards. Capital taxes are among the most economically damaging forms of taxation precisely because they reduce the incentive to innovate and invest. And while taxes on capital gains do raise revenue, the economic costs exceed the amount of tax collected.
Previous governments in Canada understood these facts. In the 2000 federal budget, then-finance minister Paul Martin said a “key factor contributing to the difficulty of raising capital by new startups is the fact that individuals who sell existing investments and reinvest in others must pay tax on any realized capital gains,” an explicit acknowledgment of the lock-in effect and costs of capital gains taxes. Further, that Liberal government reduced the capital gains inclusion rate, acknowledging the importance of a strong investment climate.
At a time when Canada badly needs to improve the incentives to invest, the Trudeau government’s 2024 budget has introduced a damaging tax hike. In delivering the budget, Finance Minister Chrystia Freeland said “Canada, a growing country, needs to make investments in our country and in Canadians right now.” Individuals and businesses across the country likely agree on the importance of investment. Hiking capital gains taxes will achieve the exact opposite effect.
Economy
Nigeria's Economy, Once Africa's Biggest, Slips to Fourth Place – Bloomberg
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The IMF’s World Economic Outlook estimates Nigeria’s gross domestic product at $253 billion based on current prices this year, lagging energy-rich Algeria at $267 billion, Egypt at $348 billion and South Africa at $373 billion.
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