Chinese checkers

Lately, global economists and forecasters have trained their sights on the West to worry over the possibility of a US recession and stagflation in the Eurozone. But a crisis of equally serious and complex proportions seems to be unfolding in China. After a perfect storm of events, China announced a shocker of a GDP print for April-June 2022 with the economy expanding just 0.4 per cent compared to 4.8 per cent in January-March. The IMF has sharply trimmed its GDP growth forecasts for China to a 40-year low of 3.3 per cent in 2022 and 4.6 per cent in 2023. The recent cut in interest rates by the Chinese central bank, even as other banks are on a tightening spree, has stoked fears that the pace of deceleration in China is acquiring a momentum of its own.

While the economic troubles at most countries were precipitated by external events such as Covid and the Russia-Ukraine war, the curious aspect of China’s slowdown is that it appears to be partly self-inflicted. Even as most nations discarded lockdowns and turned to vaccinations to control Covid from 2021, China has inexplicably embraced a zero-Covid policy that has locked down its major industrial hubs and severed its connections with the rest of the world while the draconian quarantine rules have hit labour mobility. This has played havoc with China’s manufacturing output which has grown sub-4 per cent lately and dented consumer spending by 0.8 per cent in the last quarter. This came on top of Beijing’s three-red-lines policy which all but shut off credit to the real estate sector, triggered defaults by developers and mortgage strikes by homebuyers, forcing the property market into a decline. Technology and streaming platforms, earlier engines of growth, have also seen regulatory crack-downs. With these curbs hitting local government revenues hard, they’ve scaled back on public services and infrastructure buildouts, for long the mainstay of China’s growth model. To this volatile mix, geopolitical tensions over Taiwan have recently been added. Some commentators believe that all these developments represent efforts by the Chinese leadership, ahead of the crucial 20th Congress of the Communist Party later this year, to showcase their seriousness in pursuing high-quality growth devoid of cronyism. But with exports the only functioning growth engine now impacted by the global slowdown, China’s policymakers may not find it easy to revive animal spirits, especially after having engineered the slowdown in the first place.

Given that China was expected to chip in with nearly a fourth of global growth and a sixth of all trade in the post-Covid world, this crisis spells trouble for global economic prospects. Economies such as Taiwan and South Korea which thrive on feeding China’s industrial juggernaut, are already facing the heat. As China is a prodigious consumer of industrial commodities from crude oil to iron ore and copper, this casts a cloud on commodity-driven economies such as Brazil and Australia. For India, which relies on China more for imports than exports, these developments may spell a continuation of supply chain disruptions that have hit sectors from automobiles to pharmaceuticals. China’s black-box policies offer a window of opportunity for India to woo foreign direct and portfolio investors to bet on a liberal and well-managed economy that is on the revival path post-pandemic. Hopefully, policymakers will seize on this opportunity.