The Asian giant hits a ceiling by changing its model based on world trade with exports by flag to one that focuses on household consumption as the main economic driver
China has introduced a zero-covid policy that is seriously hurting its economy and it needs to “recalibrate” to boost growth. The International Monetary Fund (IMF) itself advises it after calculating that the Asian giant will grow only 3.2% this year and 4.4% the next two years, figures that ensure the expansion of its economy, but at a much lower rate. pace than before the pandemic.
The city’s blockades to curb the spread of the virus “weigh on consumption and private investment, even in the housing sector”, currently the state’s main economic problem. For this reason, the IMF believes that China should speed up vaccination and take more measures to end the real estate crisis and boost the consumption of its citizens.
The main reason behind this policy – which aims to eradicate any transmission of the virus – is the country’s weak healthcare system. Ramón Gascón, coordinator of the Exporters Club’s Asia-Pacific working group, indicates that a high number of people infected with covid would cause absenteeism that cannot be allowed and that the health system could collapse by not being prepared on a proportional number of admissions of what happened in Europe or the United States at the beginning of the pandemic. “It doesn’t look like this policy will change any time soon because they don’t have the same level of immunity as we have in the West,” he explained.
In addition, it should be taken into account that the Chinese government has made this strategy against covid its flagship because it was very successful at the beginning of the pandemic. “Going back now would mean admitting a mistake,” says Josep Comajuncosa, professor of economics and finance at Esade along the same lines.
It is clear that closing borders and ports does not promote economic activity. But apart from that, it was hard to maintain that the Chinese economy was growing at more than 10% year-on-year before the major crisis of 2008. The Asian giant’s rise was consolidated at 6%-7% thereafter and that trend was interrupted by the pandemic when it grew just 2% – a milestone in itself given the GDP collapse experienced by other powerhouses such as the United States and Europe. suffered from in 2020-. This is influenced by the change in the economic model from a country that is heavily based on exports and investment to one that focuses more on household consumption and public services.
Comajuncosa explains that this transition to a middle-income economy requires growth rates that have never been this high. The Chinese government expected to settle for 6% growth as normal, but that is not happening. “The pandemic and the longer effects of the closures that are still happening have a lot of influence on the economy,” says the professor, who also indicates that there is an open discussion about whether China is in the “trap of middle-income countries”.
While it’s hard to compare because none are as big as China, it could be similar to what happened in some Latin American countries like Mexico or Peru, as well as Turkey. They are countries that manage to grow to that stage by using their natural resources or cheap labor, but once they reach that point of growth, they do not join the group of developed countries. It has also happened to Brazil or South Africa, they remain “stuck”. “The change in the model was something that the Chinese government wanted as it implies a spread of wealth to broader segments of the population, but their idea was to keep growing at about 6% and this is not being delivered,” explains Comajuncosa from.
Analysts agree that China will not be what it used to be, but “it doesn’t have to be like that”: “It’s like climbing a mountain, there comes a time when you reach the top and you just have to even though it is still a first-class ‘player’ in the world,” assures Gascón.
The PMI indices confirm this theory. The Chinese economy recovered in the third quarter (3.9%) after the quarterly contraction in the second quarter (-2.7%), but activity data is not particularly optimistic. The manufacturing PMI (which measures the level of industrial activity) remains below the 50 level, signaling economic contraction. In November, the indicator reached 48 points, up from 49.2 points in October, the lowest level since April. The PMI for non-manufacturing activity fared even worse, falling to 46.7 points in November, also its worst reading since April. “These data reflect the weakening of global demand with China, although the difficulties associated with the zero covid policy also continue to weigh on domestic business,” said Ebury’s Director of Risks, Enrique Díaz-Álvarez.
At a time of inflationary crisis in the Western world, prices in China are striking as they failed to rise above 2.8% this year. The government controls its own currency (the yuan) and has continued to ease monetary policy to try to support the economy and take some of the pressure off the tight pandemic restrictions. The position of its central bank contrasts with that of its counterparts, both in Asia and especially in Europe (ECB) and the United States (Fed).
The problem is the risk this has posed for the yuan in recent months, although a pause in the easing cycle should limit depreciation pressures on the currency. “Easing in China has benefited from price pressures, although an increase in inflation towards the central bank’s target of 3% and the recent fall in the yuan may prevent additional easing,” warns Díaz-Álvarez . Headline CPI inflation rose to 2.8% in September, the highest level since April 2020. That said, the sharp fall in output price inflation (0.9% from over 13% at the end of last year) may help boost consumer prices in the medium term.
Europe’s goal since the pandemic became aware of its lack of supplies is to bring production closer and stop being so dependent on China. But it is a goal that cannot be achieved in two days. “There is a consensus that dependence cannot be that high, but we need to look at how we can achieve that and which countries can benefit the most, such as Vietnam,” explains Gascón.
For his part, Esade professor Comajuncosa assures that if Europe had decided ten years ago to cut itself off from its dependence on China, it would have done much more damage to the Asian giant’s economy, based much more on exports, than it is now. “Globalization is slowing down, but it is becoming a regionalization of the world economy where China could be the main exporter in the entire Asia-Pacific region,” he says.
This new trade policy forces China to refocus, which may slow growth for a while, but then return to normal “if you choose your importing countries well”. This is how China now looks at the rest of Asia, Africa and Latin America.
The warning comes from the businessmen dedicated to exports: “Moving global value chains out of China is not going to happen anytime soon, nor will it be achieved any time soon.” The experts gathered by the Exporters Club, at an event organized by the consulting firm Iberglobal, assured that although this process has already begun, it is “very difficult” to replace the Asian country as the main production center and they assure that currently “no territory in the world has its characteristics”.
Speaking at the meeting, AON’s Global Risk Consulting Director, Carlos Bereciartua, highlighted the concerns companies are currently feeling about the economic and human costs associated with supply chain changes. “Companies are aware that restructuring of the value chain entails a range of financial and personnel costs, and that not all companies have the strength to cope at this time,” he said.
The possible new commercial partners of the Spanish companies would be the countries of ASEAN (Association of Southeast Asian Countries) because they are “comfortable in terms of deliveries and known to the Spanish market”. On the other hand, they lamented the chance Latin America loses to take over from China in global value chains and pointed to Morocco as an interesting option for Spanish companies.
Source: La Verdad
I’m Ben Stock, a journalist and author at Today Times Live. I specialize in economic news and have been working in the news industry for over five years. My experience spans from local journalism to international business reporting. In my career I’ve had the opportunity to interview some of the world’s leading economists and financial experts, giving me an insight into global trends that is unique among journalists.
