China’s slowing economy is creating problems in the United States and around the world
As the Chinese Communist Party convention approaches this year, troubles are coming to the Chinese economy not as lone spies but as battalions. This must be of considerable concern for a vulnerable US and global economy. So far, China has been the main driver of global economic growth. It was also the world’s largest consumer of international raw materials and a very large export market for the heavily export-dependent German economy.
One of the main sources of recent troubles in the Chinese economy has been President Xi Jinping’s zero-tolerance policy on COVID. In an effort to eradicate the pandemic, Xi has locked down major cities like Shanghai and Beijing. This has at times involved more than 350 million workers unable to work normally.
It’s no wonder, then, that China’s once fast-growing economy has come to a virtual standstill. It only managed to achieve a growth rate of 0.4% in the fiscal year that ended in July. This was well below the government’s 5.5% target.
It seems unlikely that this damaging COVID policy will be reversed any time soon. Seeking a third term as president at the upcoming Communist Party convention, Xi cannot afford to lose face by flip-flopping on COVID policy. Yet this will most likely delay any Chinese economic rebound.
Serious signs of trouble are also resurfacing in China’s all-important real estate sector. This sector represents nearly 30% of the country’s economy and nearly 70% of household wealth.
Already last year, 30 Chinese property developers, including the largest Evergrande, began to default on their mountains of debt. They did so against the backdrop of the government’s efforts to rein in credit expansion to put China’s real estate market on a more sustainable footing.
They also did so at a time when China’s housing bubble led to an estimated 65 million unoccupied homes and credit expansion at a faster rate than that which preceded the collapse of the US housing market in 2007. A sure sign that China’s property market bubble is bursting is the steady decline in property prices over the past year.
China’s housing crisis appears to be worsening as a growing number of households refuse to make mortgage payments on properties they have purchased but have not yet completed. This mortgage boycott, which now affects around one million households, could spread the Chinese real estate crisis to the country’s banking system. That, in turn, threatens to hamper the country’s growth prospects by landing on its banking system a mountain of non-performing loans, as happened during Japan’s lost economic decade.
As if that weren’t cause enough for concern, China has engaged in aggressive military exercises near Taiwan, perhaps to distract from its economic woes ahead of the convention. This is already discouraging foreign investment and raising questions about the wisdom of relying on China as a key part of the global supply chain and Taiwan as a major microchip supplier.
There is never a good time for a slowdown in China, the world’s second largest economy. However, now seems a particularly bad time for the struggling economies of the United States and other nations. The German economic power, which depends heavily on China for its exports, is already facing major cuts in Russian energy supplies. At the same time, heavily indebted emerging market economies, already on the verge of default, can ill afford the additional downward pressure on international commodity prices that a further slowdown in the Chinese economy would bring.
From a US perspective, the bleak Chinese outlook should raise questions about the wisdom of the Federal Reserve’s current hawkish monetary policy as the US already appears to be on the brink of a recession. Not only will China’s slowing economy likely continue to dampen US inflationary pressure by contributing to a further decline in international energy and food prices; it is also likely to constrain US export prospects by contributing to a further slowdown in the global economy.
Desmond Lachman is a senior fellow at the American Enterprise Institute. He was Deputy Director of the Policy Development and Review Department at the International Monetary Fund and Chief Emerging Markets Economic Strategist at Salomon Smith Barney.