Hi everyone! I hope you are all doing well. Welcome back to another blog. This article will discuss the topic in detail “China’s Inability to Rescue Global Economy”. China, which is the world’s second-largest economy, was expected to play a major role in the global economic recovery. However, recent events have shown that China may be unable to rescue the global economy.
China has been the primary driver of global economic growth since the 2008 financial crisis. However, it is currently experiencing an imbalanced recovery. The rest of the world is on the verge of a recession. This situation presents a significant challenge for Western policymakers. They would like to see a more balanced recovery in China, given its crucial role in driving global economic growth. Despite their efforts, the situation remains uncertain and unpredictable.
In December, China decided to abandon its three-year-long policy of zero COVID, and since then, the country’s economy hasn’t been performing at its best. China’s imports have taken a sharp decline in April, contracting by 7.9%, while their exports grew at a slower pace of 8.5% compared to the 14.8% growth in March. In April, consumer prices saw the slowest increase in more than two years, and factory gate deflation, which refers to the prices offered by China’s industrial wholesalers, has worsened.
Has China’s Era of Prosperity Come to an End?
According to the director of the China Institute at the School of Oriental and African Studies in London, Steve Tsang, China’s economy is not on the brink of collapse, but it is also not experiencing the same rapid growth it did in the 2010s. Rather than reaching double-digit levels, as it did in the past, the economy is experiencing a more moderate rate of growth.
Despite this, a strong economic recovery in China would be beneficial, as it could help to offset the anticipated slowdown in other parts of the world. This slowdown has been brought about by the tightening of monetary policies by central banks over the past year to year and a half.
China’s massive stimulus package in the aftermath of the 2008/09 financial crisis played a significant role in reviving the global economy. This was primarily due to China’s insatiable demand for imported raw materials for infrastructure development projects.
However, these stimulus measures have left China grappling with an enormous debt burden. In March, the International Monetary Fund cautioned that the debt owed by Chinese local governments alone has surged to a record 66 trillion yuan, which is equivalent to half of the country’s gross domestic product.
According to Tsang, Western policymakers who are now relying on China to rejuvenate their economies must consider the new political and economic realities without any preconceived notions.
China’s Isolation Deepens Amidst Growing Threat from Taiwan
The West continues to feel threatened by China’s persistent claims to Taiwan and its potential invasion. This, along with Beijing’s cordial relationship with Moscow and its neutral stance on Russia’s invasion of Ukraine, has placed global economic cooperation in jeopardy.
According to Pushan Dutt, an economics professor at INSEAD business school in Singapore, any escalation of tensions or outbreak of war related to Taiwan would result in a major upheaval. Multinational companies would likely depart China, export markets would close, and sanctions would be implemented. The consequences of such a situation would be far-reaching and profound.
During the Trump administration, trade tensions between Beijing and Washington emerged, and they have continued during President Joe Biden’s term. The two nations engaged in tit-for-tat tariff measures, resulting in the US imposing sanctions on various Chinese companies and officials. To protect national security, Washington has even limited China’s ability to access American semiconductor and artificial intelligence (AI) technology.
Tsang Said:
“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.”
Western policymakers are becoming increasingly wary of China’s Belt and Road Initiative, which has been nicknamed the New Silk Road. This ambitious project involves an investment of $840 billion in infrastructure such as roads, bridges, ports, and hospitals across more than 150 countries.
There are concerns that the initiative is leading developing nations into debt traps by offering them large loans that they cannot afford to pay back. This has resulted in weaker ties with Western countries, leading to further unease.
Recently, the President of the European Central Bank, Christine Lagarde, expressed concern over the possibility of the global economy becoming fragmented into rival blocs led by China and the US. She warned that this could have a detrimental impact on growth and result in higher inflation.
Beijing Prioritizes ‘Quality Growth’
One reason for China’s slower economic recovery is Beijing’s intentional plan to prioritize the quality of growth over quantity. This involves shifting away from being a low-end manufacturer and towards dominating industries of the future. Such a strategic shift requires time and effort.
According to Dutt, China has been attempting to engineer this transformation to boost innovation and domestic consumption. That moves away from heavy industries that are primarily controlled by state-owned companies. Consequently, a natural result of this shift is a slowdown in economic growth.
Xi Holding the Economy Back
Tsang informed DW that Xi wants to make the Chinese economy more dynamic and innovative. But his policies often have the opposite effect. Xi’s tightening grip on power and refusal to admit mistakes makes it nearly impossible for technocrats to revitalize the economy.
Despite Western demand affecting Chinese exports. The IMF predicts China will contribute 22.6% to global economic growth over the next five years. While the US will only contribute 11.3%. The domestic Chinese economy has reasons for optimism, with pent-up demand from the COVID-19 lockdown.
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