Chinese Economy Nearing A Reckoning

Date: 5/17/2022
Author: Mr. X

Last year, China faced an existential economic crisis. While the government overcame it, the reckoning could have been simply delayed, not prevented.

The Chinese government’s “zero COVID” policy is wreaking havoc on the country’s economy. World Heath Organization Secretary General Tedros Adhanom Ghebreyesus said that the strategy is “unsustainable, considering the behavior of the virus now and what we think in the future.” In response, China has censored the director behind its “Great Firewall.”

The decision to lockdown Shanghai in order to combat a local outbreak dealt a severe blow to the country’s economy. Retail sales declined more than 11% year-by-year in April, a fall almost double what experts were predicting. Industrial production also declined. The jobless rate rose to over 6%.

These figures are comparable to February 2020 – when the COVID-19 outbreak first began. In the 31 largest cities, unemployment rose to over 6.7%. That’s worse than before the pandemic.

The Chinese government reportedly has a target of 5.5% economic growth this year. This is looking increasingly unrealistic. Forget that – it’s not happening.

There’s also the question of how many figures coming out of China are even reliable. In a 2020 report, The Federal Reserve Bank of New York referred to an entire literature dedicated to separating facts from fiction out of the economic data from China. This leads to a search for other measures, which may or may not be reliable. “Against a backdrop of doubt surrounding official statistics, there is a long history among market participants, policymakers, and academic researchers of using alternative indicators as proxies for the business cycle in China,” the Fed report stated.

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There are also continuing problems in the real estate sector. Sunac China Holdings Ltd. is the fourth largest developer in the country. It just missed a payment and doesn’t expect to meet other obligations. The Chinese government has reportedly asked other major property developers to issue bonds – but who would buy them? The Chinese bond market is plummeting, as investors don’t see this as a “safe haven” to place their money.

In response to the partially self-inflicted wound to its economy, the Chinese government is turning to stimulus measures. It is providing rebates to Chinese companies as well as tax cuts. The People’s Bank of China is easing access to credit. This is a dangerous policy when China is already dealing with a major debt crisis. “To attain the 5.5% target, China may be borrowing from the future and incur more debt,” as analysts from ANZ Research put it.

We Americans also know where this is going. We’ve already done this, and we are now dealing with the consequences. The Biden Administration and the Federal Reserve, for political and economic reasons, have put fighting inflation at the top of their domestic priority list. Unfortunately, there are already concerns that the Federal Reserve has done too little, too late.

Yet as dire as the American situation is, the federal government still enjoys a currency that has only strengthened while the world economy struggles to recover. The dollar is still king. The Chinese yuan is rapidly falling in value against the greenback and there’s no end in sight. America can get away with spending like this. China can’t.

The Chinese response to COVID-19 also raises fundamental questions about Beijing’s very model of government. In 2020 and 2021, China looked to be something of a model in containing the disease while Western nations looked chaotic and ineffective. Now, as Western nations are moving past the COVID-19 pandemic, China is reverting back to the panicked days of 2020, crippling its economy by using a strategy that doesn’t work. The fact that China is reverting to lockdowns also raises questions about the effectiveness of China’s anti-COVID vaccines. While the United States has both traditional vaccines and mRNA vaccines for COVID-19, no mRNA vaccines are available in China.

There’s a great deal of speculation about political instability in China, something we could easily dismiss except it shows the cracks in Beijing’s control of information. Videos from Shanghai that can only be called uncanny have swamped social media, with people screaming out of apartment windows and reporting food shortages. Some of these videos and compilations have even gone viral within China itself.

All this comes while there are rumors about President Xi Jinping suffering health problems. Political struggles in these kinds of governments are often disguised as “health problems” because it’s an easy way of explaining someone’s fall from power.  Voice of America, which we can take as close to an official American source as exists, says President Jinping has “bet it all” on a zero COVID-19 strategy, implying it won’t work.

There may also be something more happening behind the scenes. Over the last few years, the Chinese government has made it very clear that the state, not tech oligarchs like Jack Ma, will exclusively hold political power. Yet the COVID crisis is highlighting a divide between authorities in Beijing and regional authorities in Shanghai. To oversimplify it, it’s a battle between those who see power in geopolitical terms and economic terms.

We’re all being reminded that geopolitics still matters. While some are predicting that this moment in world history marks the beginning of the end of the Western-led world order, such pronouncements seem premature. The Chinese economy is rickety, the Russian military adventure is bogged down, and even regional powers like India are restricting food exports in preparation for future shortages.


Yet governments like those in China and Russia, though they seem “strong,” are more fragile than liberal democracies. America is extremely divided on the surface, but there was almost unanimous bipartisan consensus when it came to aiding Ukraine. Senator Rand Paul (R-KY) was almost a lone voice of opposition. To put the $40 billion reportedly being sent to Ukraine when this measure passes, Russia’s entire military budget in 2021 was less than $66 billion. In America, that amount of money is barely a political issue.

Authoritarian governments must justify their system based on continued success. China’s supposed superiority in managing COVID-19 now stands revealed as a lie. Russia’s supposed military might is also questionable.

The scary part is that leaders in both systems may yet escalate. Russia has finally captured Mariupol and is showing every sign of annexing occupied Ukrainian territories including Kherson. Whether the Luhansk People’s Republic and the Donetsk People’s Republic retain nominal independence or not doesn’t change the reality that they will be controlled by Moscow. If the situation deteriorates, President Putin may try to mobilize the nation for a more existential conflict, something he failed to do on Victory Day. I was expecting such a move earlier, but it appears he’s keeping it in reserve. President Putin has no way to climb down from his current predicament without losing face and political power. President Joe Biden knows this, but he doesn’t have any answers about how to provide one. Perhaps there isn’t one without Ukraine ceding territory, something Kyiv will refuse to do.

China may be in the same position if the economic starts to truly deteriorate. The fact that its reverting to strategies that America has already burned through is not a hopeful sign, especially when China can’t rely on the yuan being seen as a safe harbor the same way the dollar is. As a result, if economic conditions keep declining, look for China to start taking a more overtly anti-American line in foreign policy. The most obvious example would be more forthright support for Russia, whose cause remains fairly popular among the Chinese people. If the government propaganda machine turns up the intensity, it will become more so.

What’s clear is that expectations for a broad-based, “Roaring Twenties,” global post-pandemic recovery were misplaced. It will be a long, slow climb simply for economies to return to where they were. Continuing supply chain snags and energy shortages will complicate the picture. It’s in these areas where politics sabotages the global economic machine that the greatest trading opportunities will present themselves.

We may be moving towards a world of more self-contained, regional economies rather than globalization. It’s the return of empires. That might be bad for consumers, but good for investors who can get out in front of the trend before policymakers and corporate leaders.

Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for to bring you news on what those with power are debating, planning, and doing.

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