CChina has been at the heart of the globalization story for the past 30 years, but now it is struggling. More than two years after the discovery of Covid-19 cases in Wuhan, the world’s most populous country has yet to contain the virus. severe blockade It is imposed because China’s vaccines are not as effective as in the West and have lower levels of immunity.
Growth is slowing, and not just because of the strict restrictions that President Xi Jinping insists on. Flaws in China’s economic model coupled with a more hostile geopolitical climate mean the era of explosive expansion is over.
unlike us this U.K. Or the euro area, where China doesn’t face the inflation problem that prompts the central bank to raise (or consider raising) interest rates. Instead, the People’s Bank of China is easing policy to stimulate credit growth. Authorities will try to get out of the woods through consumption and exports.
After the 2007-09 global financial crisis, China’s rise as an economic superpower was finally recognized. With its banks unable to function properly, the United States cannot undertake its traditional task of dragging the global economy out of recession. Instead, the role of the locomotive falls to China, which provides a dual boost to its economy through public investment and credit expansion. China grew at a double-digit rate, absorbing goods from Germany and Japan.
There are costs to this policy, one economic and one political. The economic price is that China has incurred huge debts, which has fueled a real estate boom. Nonfinancial debt as a share of the economy’s annual output (gross domestic product) has more than doubled since pre-GFC levels to 290% of GDP.The real estate giant’s problem Evergrande Highlight the vulnerability of the economy to debt crises.
The political cost was initially a matter of perception: America feared that China posed a threat to America’s economic hegemony. Washington had been worried about the threat posed by Japan in the 1980s, but China was a different story. Initially, Washington assumed that as China became richer, its political system would become more democratic. Mr. Xi’s hard-line approach to dissent has dissuaded U.S. politicians from the notion. As a result, the process of globalization has stalled and then regressed. Under Trump, the US has turned protectionist and encouraged companies to bring production back home. Complaints of patent piracy and intellectual property theft in China are growing.US release pressure on alliesincluding the United Kingdom, prohibits Chinese inward investment in certain areas.
This trend was then amplified by the pandemic, which has made the West more wary of being exposed to long supply chains that end in China. While China will eventually emerge from the Covid-19 lockdown, recent restrictions in Shanghai and elsewhere have heightened tensions. In early 2017, Xi Jinping appeared as a champion of globalization at the World Economic Forum in Davos, seemingly a long time ago.
The upshot of all this is that China’s growth rate certainly looks set to slow. Weak growth and a zero-tolerance approach to Covid have created conditions for political dissent and repression. The underlying problems with the economy could get worse, especially if authorities decide that uneven growth is better than no growth.
In the West, especially in the United States, there will be many people who will be happy about China’s unease. There’s not much unity between Democrats and Republicans these days, but one of them is hostility toward Beijing. Donald Trump’s trade war has led to a marked cooling in relations between the two countries, but they remain lukewarm under Joe Biden.
Washington should be careful about its wishes. China is a huge economy, and a full-blown economic collapse would hurt the world just as much as another subprime crisis in the US or the breakup of the euro.
However, there is another reason to worry. As Charles Dumas points out in a TS Lombard report, China’s full integration into the global economy has been a key factor in the steady rise in Wall Street stock prices since the early 1990s.
Dumas said that the past 100 years or so can be divided into two parts: the 1914-91 period and the post-Cold War period. The first period included two world wars, the Great Depression in the 1930s and high inflation in the 1970s, and communism always offered an alternative to capitalism. In the second period, capitalism triumphed over communism, and Western companies moved to China, where labor costs were lower. Profits rose, and the rate of return investors demanded to put their money at risk fell.
The “danger” for the current market is that Russia’s invasion of Ukraine, coupled with US-China splitting and deglobalisation, heralds investor insecurities and the need for higher real yield yields, which could be a new source of tension between the two countries cold war. West and China/Russia (former communist state, now totalitarian state),” Dumas said.
There have been four stock market crashes in the past 100 years: the Wall Street crash in 1929, the Japanese stock market bubble burst in 1991, the dot-com bust a decade later, and the global financial crisis.
Stocks have fallen sharply in recent weeks, and the assumption, as always, is that they will bounce back. The truth, however, is that the world is more dangerous than it was not long ago, and China is a big reason why.