Will China, which is growing half-mast, continue to be the driving force of the world economy?


Posted 4 months ago-October 20, 2021

Is China’s economy drinking water like the Zhengzhou flood in July 2021? (Source: Barron’s)

Beijing’s bad news: China’s GDP growth fell to 4.9% in the third quarter of 2021, well below expert expectations and showed the worst performance in the last few years. Numbers that could warn of the risk of stagflation and question the assumption that China is the driving force of global economic growth.

These figures from the National Bureau of Statistics of China (BNS) should be compared to 7.9% growth in the second half and 18.3% growth in the January-March 2021 period. After Covid-19 under good industrial conditions, China was recognized as the best of the world’s major economies.

Let’s remember. Despite being heavily affected by the pandemic that occurred in Wuhan, China at the end of 2019, China was the only major economy in the world to grow flat in 2020 (+ 2.3%). The result supporting some analysts’ predictions was that China would inevitably become a world-leading economic power around 2028 and then exceed US GDP.

However, other statistics have made economists worried about the health of the country’s economic machinery. In this way, China’s industrial production disappointed the market with a growth rate of only 3.1% in September compared to September 2020, compared to 5.3% in August. As part of that, inflation is rising at a worrying rate. Meanwhile, retail sales exceeded expectations. Retail sales were up 4.4%, above August (+ 2.5%) and above Bloomberg (+ 3.5%) expectations.

Power shortage and reduced coal production

Of course, there is a reason for this slowdown in the economy. Among them, the serious power shortage has affected factories and the entire manufacturing industry in China since the beginning of autumn. This power shortage forced several states to impose rations, leading to power outages in homes and factories. Among the affected factories, those that produce cement, steel and aluminum, which are of particular importance to the national economy. “This decline in manufacturing seems to get worse,” Julian Evans Pritchard, an economist at Capital Economics, was quoted by the BBC.

In addition to this, the real estate scandal caused by the huge Evergrande and the de facto bankruptcy of several other major promoters in the country has caused the real estate bubble to collapse and pollute other sectors of the country’s economy. It fuels concerns about risk. .. In addition, record floods in Shaanxi, which produces 30% of fuel in Shaanxi alone, have dramatically reduced coal production. Authorities have also decided to reduce coal production at large power plants in order to reduce greenhouse gas emissions and comply with China’s commitment to combating global warming.

“Since the beginning of this year, energy prices have risen sharply in the international market, especially in the natural gas and oil markets, which have reached unprecedented heights, which is declining the supply of electricity and coal in China. It’s between “, This Monday, October 18th, BNS spokesman Fu Linghui emphasized: South China Morning Post.The whole set of factors led to this distribution [d’électricité] In some parts of the country, it clearly affected production. »»

Another concern: investment in infrastructure, goods and services, and machinery increased by only 7.3% between January and September compared to the same period in 2020. Again, this is below market expectations.

Impact on the world economy

While waiting for Beijing to turn around, the announcement of the world’s second-largest economic decline quickly weighed on the international stock market on Monday. After that, it recovered significantly.

All of this leads to big problems. Is China entering a period of stagflation that occurs when it hits an economy with a mixture of low growth, high inflation and rising unemployment? Some Chinese economists quoted in Hong Kong newspapers think so. “Third quarter figures support concerns about the increased risk of stagflation. Zhang Zhiwei, Chief Economist of the Pinpoint Asset Management Group, says. But the unemployment rate has dropped considerably, which is surprising. »»

For Woei Chen-Ho, an economist at the United Overseas Bank of Singapore, a shortage of energy sectors and a real estate crisis could lead to a revision of the Chinese government’s growth forecast for 2021. “The numbers we see are actually much less than we expected. He emphasizes in an interview with the BBC. Growth will slow further in the fourth quarter due to a shortage in the energy sector. »»

Other Chinese economists, such as Shen Xinfeng of the brokerage firm Northeast Securities, are in China. “Close to stagflation” In other words, we face rising production costs and a gradual rise in consumer prices, but growth is permanently slowed.

What if such a sustained slowdown in growth hinders the driving force of China’s global economy? Interdependence emphasizes quartz sites, as continuous and brutal slowdowns cause panic winds everywhere on Earth. In 2000, foreign investors held nearly 3.5% of China’s equity and bond markets. The percentage may seem small, but it amounts to hundreds of billions of dollars. In return, China is one of the largest buyers of US Treasuries. If it delays the purchase of these bonds, the United States will need to attract other customers by raising its interest rates, which will affect interest rates across the US economy. According to a survey by the Asian Development Bank, China’s negative growth shock will have a major impact on emerging countries in Asia and other BRICS countries, which will be much stronger than in Western countries.

Beijing wants to be relieved

However, some officials have tried to alleviate these concerns. Like Yao Jin Yuan, he is a member of the State Council’s advisory office and you don’t have to worry too much. “China does not experience significant inflation because it cannot find a basis for such a phenomenon, let alone hyperinflation.” He guaranteed. According to him, one solution is to ensure that authorities stabilize household income and avoid inflation, which may allow the country’s monetary policy to be relaxed. ..

Prime Minister Li Keqiang, who visited the large-scale trade fair in Canton on October 15, also wanted to be relieved. “China has the right tools to address the economic challenges facing the country. […] And you should be able to achieve a growth rate of over 6%. ” He admitted, however, that the economy is facing “Many factors of instability and uncertainty”.

Faced with a panic due to a power shortage, Beijing had to confront in early October the decision to reduce power production from the country’s large coal-fired power plants. The government has since resigned to encourage Chinese mining companies to reproduce as much as possible. To encourage them, authorities have partially liberalized electricity prices, allowing producers to sell them at 20% higher rates than imposed by regulators.Therefore, electricity prices will rise, spurring inflation that is already rising.

Until 2016, China was experiencing remarkable double-digit growth rates. An “economic miracle” caused by Deng Xiaoping’s major reforms in 1978. However, since that date, China’s GDP growth has already slowed, moving between 6% and 7%. Due to the pandemic, growth experienced a soft spot in the first quarter of 2020, with negative growth of -6.8%.

A few days ago, the International Monetary Fund (IMF) first issued a warning of slowing growth, slightly lowering China’s growth forecast for 2021 (8% from the previous 8.1%).Beijing government always pays attention, growth forecast “6% or more” This year.

The fact remains that China, contrary to all possibilities, continues to be a country that is admired by foreign investors. Therefore, foreign direct investment reached approximately $ 114 billion in the first eight months of this year. It reached about $ 144 billion in 2020 as a whole. According to experts, 2021 could be a new record.

Pierre Antoine Donette

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About the author

Former AFP journalist Pierre-Antoine Donnet is the author of 15 books focusing on key challenges in China, Japan, Tibet, India, and Asia. In 2020, this former correspondent in Beijing announced “Global Leadership in Issues, Conflict between China and the United States” with Éditions del’Aube. He is also the author of “Tibetmortouvive”, published by Gallimard in 1990 and reissued in an updated and enhanced version in 2019. His latest book, “China, the Great Predator,” was published in 2021 by Éditions del’Aube.