Weekly Brief: The Cracks In The Chinese Economy Are Beginning To Show

Weekly Brief: The Cracks In The Chinese Economy Are Beginning To Show

almost 2 years ago3 mins

The cracks are finally beginning to show in China’s once-dominant comeback, as manufacturing, shipping, and trade all start to fall apart.

🕰 Recap

  • China’s economy was already showing signs of trouble after the country’s late-March lockdowns
  • But earlier this month, China doubled down on its “zero-Covid” policies despite the damage it’s been doing
  • Those lockdowns are now denting the country’s exports and imports, with data out this week showing Chinese trade barely grew in April

✍️ Connecting The Dots

Both China’s biggest pandemic outbreak in two years and its government’s zero-Covid policies have pushed nearly one-third of the population into some sort of lockdown, with shops shuttered and factories struggling. That’s had a massive impact on consumer demand, with retail sales expected to have slipped 6% in April from the same time last year. That might be why the value of China’s imports didn’t climb at all last month, down from the double-digit growth of just two months before.

All these lockdowns are taking their toll on manufacturing activity too, which fell to its lowest since 2020 last month. That’s already beginning to damage the country’s exports, given that there are fewer goods to send off to the rest of the world. Plus, China is having big problems shipping those it does manage to produce, with Shanghai – home to the world’s largest port, handling around one-fifth of China’s volume – having been rocked by lockdowns for weeks. That partly explains why the value of Chinese exports shipped in April was up just 4% from the same time last year – a far cry from March’s 15%, and the smallest uptick since the depths of the pandemic in June 2020.

The abrupt slowdown in trade is bound to put even more strain on global supply chains, as well as fuel more concerns about the state of China’s economy. After all, exports have been a huge growth driver for the country, helping propel it out of its Covid-induced slump to a better-than-expected performance in 2021.

🥡 Takeaways

1. China can’t have it all.

The Chinese government is trying to hit a 2022 growth target of about 5.5%, reduce debt, and eliminate Covid. But all these goals contradict each other, and the government will ultimately have to make sacrifices. That’s why most economists have now slashed their growth forecasts for the country to well below 5.5%, arguing that its goal simply isn’t achievable as long as it sticks with its zero-Covid plan. But sacrificing growth might be the lesser of two evils: China risks 1.6 million deaths if the government allows Omicron to spread unchecked, according to researchers at Shanghai’s Fudan University.

2. China’s issues are ours too.

Right now, major central banks are aggressively raising interest rates in an effort to lower demand and tame inflation. But a big part of the inflation problem isn’t down to demand: it’s down to supply. And with Chinese manufacturers struggling and port activity in Shanghai falling, shortages of goods are only going to intensify. Consider too that China’s problems aren’t just contributing to inflation: they could likewise lead to a drop in global economic growth. China accounts for almost one-fifth of global output, meaning the country’s slowdown could have serious – potentially stagflationary – repercussions for the global economy as a whole.

🎯 Also On Our Radar

Crypto token TerraUSD – an algorithmic stablecoin meant to always trade at $1 – lost its peg earlier this week, at one point trading below 30 cents. That wiped out virtually the entire market value of its sister token, Luna – a blue-chip DeFi crypto that was once among the top 10 biggest coins in the world, with a market value at its peak of over $40 billion. The collapse exacerbated selloffs in other corners of the crypto market, and prompted regulators to again highlight the need for a regulatory framework for stablecoins.

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