The economic planet | Chinese engine misfires

In China, the oldest still remember the years of starvation and rationing, while the youngest are more and more likely to suffer from obesity and diabetes.

Helene Baril
The Press

It’s the China Dailymedia controlled by the Chinese state, which recently deplored: the country must absolutely combat overeating, which is wreaking havoc in the country.

China’s economic progress over the past 50 years is remarkable. In particular, it allowed the President, Xi Jingping, to officially proclaim in 2021 that extreme poverty no longer existed in China.

It is difficult to know if this is really the case, but what is certain is that the Chinese have enriched themselves collectively and individually in a relatively short period of time. To the point that they have to deal today with the same problems as the so-called rich countries. Obesity and diabetes are examples, rising inequality is another. There is also debt and bankruptcy, which have become a major concern for Beijing’s leaders.

With the opening of the regime to the private sector and to the rules of the game of capitalism, the use of debt has made it possible to create giants in certain key sectors, such as Evergrande in real estate.

Like debt, bankruptcy is a relatively new concept in China. It is only since 2007 that companies can declare bankruptcy. Before, companies in difficulty were most often rescued by the government to avoid their closure and not to scare the population.

It is therefore possible for a Chinese company to go bankrupt, but not for Evergrande, because its difficulties undermine the economic empire patiently built since Mao.

It is certain that the Chinese government will save what can be saved from Evergrande, which is unable to meet its colossal debt obligations, estimated at more than 300 billion US dollars.

The Chinese government is also partly responsible for the fall of Evergrande, which forced companies too focused on growth through debt to deleverage. This rudder move “for common prosperity” affected real estate, technology and education, three of the most dynamic sectors of the Chinese economy.

The collapse of the Chinese real estate giant will not lead to a global financial crisis like the one we experienced with subprime mortgages in 2008, as some feared, but it will weigh heavily on China’s economic growth. The real estate sector, which is the country’s internal growth engine, is faltering and could collapse with Evergrande.

GDP growth

A year ago, the International Monetary Fund predicted China’s gross domestic product (GDP) growth of 8.1% in 2022. Its latest forecast, dated last week, is down to just 4.8% .

China was the only major country to post positive growth in 2020, as the pandemic took a nosedive from all the others. But the hard line adopted by the government to fight the pandemic is backfiring.

Closing everything at the slightest sign of a resurgence of COVID-19 cases, as the Chinese are doing, risks handicapping the growth of the world’s second largest economy and that of all the other countries, worries the IMF.

“This not only risks slowing growth, but will also have very significant consequences for global supply chains,” IMF Deputy Managing Director Gina Gopinath said in an interview with Agence France-Presse.

The Chinese government has expressed its disagreement. China’s Foreign Ministry responded that its country remains “a driving force in global economic recovery”.

However, this engine is experiencing misfires and the double-digit growth that characterized it seems to be well and truly over. Gradually, it is approaching those, more modest, of the so-called advanced countries.

And if 2022 is off to a slow start for the global economy, it’s a lot because China is struggling to manage the pandemic and keep its real estate sector from collapsing.