John Gong: China’s economic woes – unlike the US and EU’s – will fade with the pandemic

  • Dr. John Gong, Professor at the University of International Business and Economics, China Forum Expert

    There is no doubt that the global economy is entering an era of recession. Across the board, among the world’s major economies, we are seeing slower growth coupled with inflation.

    The US economy has contracted for two consecutive quarters this year, while the G7 nations managed an anaemic 0.2 per cent growth rate in the second quarter, helped mostly by Italy and Canada. China’s growth figure sank to 0.4 per cent, a level not seen in decades, barring the pandemic-induced dip in 2020.

    In the European Union and United States, inflation is still stubbornly high, hovering north of 8 per cent despite rounds of interest rate hikes. And the US Federal Reserve’s rate-hike drive appears likely to continue for a while. The strengthening dollar and the flow of capital to the US have created devastating ripple effects across the globe, especially on the emerging economies overloaded with dollar-denominated external debt.

    So far China has been relatively insulated from that, as domestic inflation is still low and the renminbi’s slide is still measured and under control. China’s remarkably resilient exports sector is probably the only bearer of good news for the economy, having delivered surprises month after month and quarter after quarter. But some say the export engine is running out of steam, as global market weakness will eventually be reflected by demand for made-in-China goods.

    Stagflation – slow growth coupled with inflation – appears to be here to stay. But it is worth noting that the kind of economic problem we are facing in China is quite different from that in the US and the EU. And as a result, the macro policy instruments are also different.

    How and if policymakers in these three largest economies can coordinate and lead the global economy out of recession remains a great challenge.

    With the US economy, the cause of the problem is overheated aggregate demand. Rounds of Covid-related economic relief – effectively, the Fed’s money printing scheme – are finally coming back to roost. The US job market is still very strong, with the unemployment rate for August at less than 4 per cent, even after rounds of interest rate hikes.

    Inflation is the result of a combination of forces, including the run-ups in commodity prices mostly triggered by sanctions on Russia, the lingering effect of pandemic economic relief on demand, and the accumulative effect of a long era of low interest rates that drove excesses in investment. In short, it is economic disequilibrium characterised by aggregate demand exceeding aggregate supply.

    The European Union also faces disequilibrium, but it is driven by the supply shortfall due to the war in Ukraine.

    Soaring energy prices and energy shortages are crippling production in Europe right now. Many companies in Germany, the economic powerhouse of the euro zone, are facing operational difficulties. Some are being driven out of business altogether. In essence, the problem rests with overcooling supply.

    In China, however, the economic challenge is inadequate demand, with domestic consumption currently being the weakest link. The supply chain network in China is still cranking out goods and has proved to be reliable so far. But the country cannot and should not export its way out of recession.

    Domestic consumption will have to pick up. The central government is doing its part in terms of pushing fiscal policies through infrastructure projects and other public expenditure. But these things tend to take a bit of time to percolate down to people’s pockets.

    Monetary policy appears to be stalling for the moment, as the corporate world is reluctant to take on more debt. Normally, one would expect the demand side to pick up strongly right after a pandemic, as was the case after the 1918 Spanish flu.

    But China isn’t there yet, with the zero-Covid policy still firmly in place. As lockdown measures continue to be implemented here and there across the mainland, consumer confidence and expenditure are not likely to recover before the end of the Covid era.

    Indeed, China is in a more comfortable position than the US and EU, because it faces an easier challenge from a macro policy perspective. The US and EU have to deal with the painful problem of curtailing demand, while in China, it is the opposite – the need to increase demand.

    But demand – post-pandemic demand, in particular – is usually automatic, as long as the public health policy that is constraining demand and consumption is removed.

    So my suggestion is simple. Patiently hang in there for a little more, till the policy changes. Most countries in the world have already moved on, and it is just a matter of time before China follows. The cure for China’s current economic difficulties is not economic policy but rather public health policy.

    (Originally published on South China Morning Post on Sep. 28, 2022.)

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