The Four Big Threats to China’s Economy

William Rhodes and Stuart Mackintosh have four distinct but overlapping economic risks.

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The following commentary is co-authored by William R. Rhodes, CEO of William R. Rhodes Global Advisors, former chairman and CEO of Citibank, and author of “Banker to the World: Leadership Lessons from the Front Lines of Global Finance“; and by Stuart Mackintosh, Executive Director of Nonprofit the Group of Thirty.

We need all care in China, because it will affect us all.

Economic dangers and Chinese President Xi Jinping’s responses to them will affect China first and foremost – but China will be in trouble this year and next.

The world is rightly focused on the atrocities of Russia in Ukraine, and China’s choice to stand in line with Russia’s straining globalization links.

But China’s economic challenges go beyond. Threats to China’s Outlook are four distinct but overlapping areas of rising: at home, in health, in debt, and in a fracturing globe.

Real estate

China’s leaders must ask their political support for a declining, weak, and unpredictable Russia.

A stumble in real estate bodes ill the economy as a whole. Economists have demonstrated that most recessions are either equity- or housing bust-related. Once home prices shake, and start falling, we know the effect of debt on declining home prices: The former amplifies the latter and can cause a collapse in wider consumption. Underwater homeowners stop spending and their house prices fall.

China is not that dangerous juncture yet. But the signs are ominous. China will never be able to apply the normal economic boom-bust rules, but the Chinese government will always have control over the entire country indefinitely. Yet we have hope that they can manage housing better than the West did in 2007-2008.

‘Zero-Covid’

As China’s housing markets shake, the effects of the pandemic policy are making economic matters worse.

China’s zero-covid policy, by far the toughest medical and public health response to the pandemic, is in trouble. Huge dividends paid for prevention of China’s rigid stance – 2020 and 2021

Today however, as the virus mutates and spreads, those measures may be more costly. An uptick in cases in Shanghai to about 20,000 a day last week caused the city to shut down, triggering civilians’ attacks and the quarantining of 26 million residents. Shanghai alone contributes 4 percent of China’s GDP and is its largest port.

Lockdowns are seen in cities across China. The negative economic impacts of its hard-to-sustain Covid policy will change in the months ahead. Already economists are cutting growth forecasts for China.

If demand in China weakens, everyone outside China may feel it too. Is it unclear whether the central government is willing or able to pivot from zero tolerance to a new approach – even if such a shift appears to require outsiders?

Risky external loans

Interest rates are rising as the developed world tries to contain inflation. Many loans are made by Chinese entities as part of Beijing’s Belt and Road Initiative, which is not the only one that strains balance-sheets across the globe, but they also burden China’s banks with nonperforming loans. Those banks, which are key conduits for Chinese domestic investment, businesses and the economy.

Belt and Road has saddled developing states with at least $ 385 billion in debts, according to a 2021 report from AidData, an international development research lab based in the College of William and Mary.

There, China faces three negative dynamics: debt defaults, non-performing loans on the books of its largest banks and state lenders, and collateral damage to diplomatic and geopolitical interests if it seizes countries’ assets as part of some onerous loan terms.

In 2022, China’s leadership will learn that not all lending is smart policy. Even if the contract appears beneficial at first glance, China needs solvent borrowers and happy customers and allies, not bilateral sleight of hand, defaults, and angry citizens.

Russia’s invasion of Ukraine

Globalization – the engine that powers China’s economic engine – risks stalling under pressure from the pandemic and Russia’s war with Ukraine. Supply chains are stretched and broken, or else being reconstituted with new routes and links.

China’s leaders must ask their political support for a declining, weak, and unpredictable Russia. Everyone benefits from such a global architecture.

Choosing Russia over globalization, which is so embedded in their country, is a shortsighted, damaging economic bargain, one that could result in secondary sanctions on Chinese companies.

Russia may continue to be war, diminished, shrunken, fueled by her oil and gas, but ostracized in most countries. China too may pay a hefty price if it goes back to Russia with the expense of engagement with the trading system for economic growth of the country.

All those tough challenges suggest that the Chinese government’s official forecast of 5.5 percent growth rate in 2022 is too optimistic. Indeed, it is now more likely that China will grow at 5 percent in 2022 – a rate not seen since the crisis in 1989 in Tiananmen Square.

China, and the rest of the globe, even as we sometimes distrust one another.

Let us hope the right choices are made – choices that are more narrowly constructed than globally framed.

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