The most recent macroeconomic figures show that the Chinese slowdown is much more severe than expected and is attributable not only to the COVID-19 lockdowns.
The lockdowns are having an enormous impact. Twenty-six of China’s 31 mainland provinces have rising coronavirus cases, and the fear of a Shanghai-style lockdown is immense. The information coming from Shanghai proves that these drastic lockdowns create enormous damage to the population. Millions of citizens without food or medicine and rising suicide rates have shown that the infamous “zero COVID” policy often disguises mass population control and repression.
It’s easy to say the COVID-19 lockdowns are the reason for the weakening of the Chinese economy, but that would be a gross simplification. The problem is deeper.
China is going through a severe slowdown caused by the burst of the enormous real estate bubble and the regime’s crackdown on the private sector, which has led to a cut in investment growth.
We must remember that there are two ways by which the Chinese regime “boosts” real GDP: by publishing a low inflation and GDP deflator figure and by massively increasing credit and infrastructure spending. However, those two can’t disguise the importance of the weakening of the Chinese economy, because it’s now structural.
To add to a difficult real estate problem, the state intervention in the private sector, called a “crackdown,” makes it even more difficult to boost growth in other industries and businesses. The fear of constant political intervention is leading to a massive slowdown in foreign direct investment growth as well as a fear of deploying capital and taking risks in the Chinese economy only to suffer grave penalties from the authorities when profits arrive.
The political intervention in the technology sector, which is one of the leading job creators in China, has sparked fears of frozen headcounts and layoffs, according to various media reports. Additionally, the decision of the central bank to cut reserve requirements for banks has not avoided a significant decline in credit growth, as reported by JPMorgan.
To all this, we must add a currency, the yuan, which is used in less than 3 percent of global transactions, according to Reuters, due to the extreme capital controls and the exchange rate fixing imposed by the central bank. Confidence in the local currency is low due to extreme intervention on the currency market, which is preventing China from having a truly international means of payment.
The aggressive and misguided lockdowns are affecting supply chains and activity, but the structural problems of rising intervention in the currency and industries as well as a heavily indebted economic model are likely to drag on real growth and jobs for a long time.