In a year in which global investors have almost too many worries to obsess over, it was a relief to know China isn’t among them.
A “V-shaped” recovery in Asia’s biggest economy was regarded as a sure thing. Beijing’s strong Covid-19 response and assertive stimulus moves were sure to produce 8% growth. Now comes indications that China’s post-pandemic boom is floundering.
Recent data on industrial production, retail sales and fixed-asset investment point to less momentum ahead. A move on Friday by the People’s Bank of China to cut reserve requirements by 50 basis-points generated more questions than answers. Often, such steps communicate a central bank has an economy’s back. In this case, it suggested that the PBOC doesn’t like the data it’s seeing.
China bulls forgot something very basic about the nation’s 2021: a giant, trade-reliant economy needs growth outside its borders to thrive. No one doubts President Xi Jinping’s team did a good job reducing the spread of Covid-19 and stabilizing domestic growth.
But there’s every reason to question the conventional wisdom that China can thrive as Delta variant worries and slow vaccination rollouts imperil its main customers.
Though off to a solid start, the U.S. recovery is facing headwinds amid vaccine hesitancy around the nation. This means that even as the biggest economy heals, a return to 2019 levels of demand and confidence will be pushed further out. In Europe, second, third and fourth waves of Covid-19 infections mean another key Chinese customer will remain hobbled longer than hoped.
Japan, Asia’s No. 2 economy, is flatlining despite increased export shipments to China this year. Prime Minister Yoshihide Suga’s government has done its approval ratings no favors with unsteady virus mitigation efforts, a slow vaccination rollout and untargeted fiscal stimulus. Nor is Japan getting the tens of millions of tourists surrounding the Tokyo Olympics on which it was counting. This month’s Games will be spectator free.
There was hope that China’s $14.7 trillion economy would be the powerful economic engine the globe desperately needs. And at least for Asia—from South Korea to Vietnam—China Inc. was just that in early 2021. It’s now clear, though, that a sizable portion of China’s bounce-back was more a matter of low base effects from the depths of the first half of 2020 than a sustainable, self-reinforcing revival.
As such, moderating Chinese growth will reverberate through legislature halls and corporate ballrooms in Asia and beyond. The same with Beijing power circles. In recent days, China’s state media has telegraphed a second-half slowdown just as the global outlook becomes more uncertain.
In Venice last weekend, when finance ministers from Group of 20 nations warned about downside risks to global growth, moderating Chinese demand seemed written between the lines in bold font.
One silver lining of disappointing Chinese growth could be moderating inflation pressures. The 5.4% surge in U.S. consumer prices in June year-on-year was a rude wakeup call for world markets. Slowing Chinese growth, though, could help cap global prices, ensuring today’s hints of overheating are transitory.
It remains a mystery, though, why Chinese retail sales haven’t perked up even as President Xi Jinping’s government managed to tame the domestic spread of Covid-19. Now that China, too, is experiencing fresh outbreaks here and there, the odds favor consumer and business confidence responding badly.
This puts Xi’s government in quite a bind. On the one hand, it’s been trying to deleverage the economy. It means clamping down on shadow-banking activity, squeezing froth out of asset markets and policing local-government borrowing. It also has meant adding bursts of liquidity to protect growth.
Case in point: the PBOC’s recent cut in reserve requirements. Yet this seems more minor gesture than a significant effort to hasten gross domestic product.
As this balancing act plays out, China probably won’t be the GDP engine bulls hoped six months ago. Xi is learning the hard way that in a world without economic engines, generating the rate of growth his party needs to maintain legitimacy will become harder and harder.
The global economy, meantime, could be in for a disappointing second half of 2021. A world without clear and powerful growth engines is one that has the China bears wishing they’d been wrong.