Should we be worried about China’s economic downturn?

The World Bank lowered its forecast to 4.3%, while investment banks forecast even weaker growth.

The growth in 2021, which reached 8%, was exceptionally, recalls Marc-Antoine Dumont, economist at Desjardins. Over the past year, Chinese factories have been operating at full capacity as parts of the world went into lockdown and demand for goods surged, he said.

It’s back to normal now. China will not be able to benefit from the same circumstances in 2022 as in 2021. »

A quote from Marc-Antoine Dumont, economist at Desjardins

The second quarter of 2022 is likely to be particularly painful. Economists forecast negative growth, a consequence of zero-COVID health policies. Several major cities, including Shanghai, have endured long and very severe restrictions that have dealt a serious blow to consumption. Result: Retail sales fell 11% in April and industrial production fell 3%.

An announced demise

However, the slowdown in China’s economy is not solely due to this particular context, but is part of a structural trend, the experts say.

China is an emerging economy trying to become a consumer economy like advanced countries like Canada and the United Statessays Marc Antoine Dumont.

This is a natural slowdown for China’s maturing economy. »

A quote from Marc-Antoine Dumont, economist at Desjardins

In recent years, China has built a significant amount of infrastructure such as ports or highways, resulting in efficiency gains for businesses. They were able to increase their exports, resulting in exceptional GDP growth. However, there is a limit to the number of highways and ports that can be built, and China is reaching that limit.emphasizes the economist.

China is known for its ability to build in record time.

Photo: Getty Images/Kevin Frayer

Even before COVID-19, Chinese growth was just 6% a year, says Alicia Garcia-Herrero, a Bruegel Institute researcher and chief Asia-Pacific economist at Hong Kong-based investment bank Natixis. %; nous devons nous habituer à cette nouvelle réalité”,”text”:”La Chine ne va plus jamais croître de 8%; nous devons nous habituer à cette nouvelle réalité”}}”>China will never grow 8% again; We have to get used to this new realityremarks Mrs. Garcia-Herrero.

It’s not on time for 2022, it’s structural. »

A quote from Alicia Garcia-Herrero, researcher at the Bruegel Institute

Another factor is demographics. The 2020 census showed faster-than-expected aging while the birth rate is at an all-time low of 8.52 births per 1,000 people.

China’s population is on the verge of shrinking, and its working-age population has been shrinking for a number of yearsnotes Philippe Aguignier, researcher at the Institut Montaigne’s Asia program and teacher at the National Institute of Oriental Languages ​​and Civilizations (Inalco) in Paris.

This is a very important headwind that the Chinese economy is facing. »

A quote from Philippe Aguignier, Associate Researcher in the Asia program at the Institut Montaigne

Another problem hampering Chinese growth is that the economy is driven more by investment than consumption. However, this model is running out of steam, argues Mr. Aguignier. In order to keep the growth rates where you want them to be, you have to invest more and more, he explains. We go into debt, which brings with it an element of financial fragility.

Real estate developer Evergrande’s setbacks over the past year have illustrated this instability well.

Aguignier. Ajoutez à cela les éléments conjoncturels, dont la gestion très particulière qu’a la Chine de la COVID-19, la guerre en Ukraine, le ralentissement des économies européennes et le renchérissement des matières premières… La barque est quand même assez chargée.”,”text”:”Il y a des éléments négatifs assez défavorables qui pèsent sur la croissance économique chinoise depuis pas mal de temps, note M.Aguignier. Ajoutez à cela les éléments conjoncturels, dont la gestion très particulière qu’a la Chine de la COVID-19, la guerre en Ukraine, le ralentissement des économies européennes et le renchérissement des matières premières… La barque est quand même assez chargée.”}}”>There are quite unfavorable negative elements that have weighed on Chinese economic growth for some time, notes Mr. Aguignier. Add to that the economic factors including China’s very particular management of COVID-19, the war in Ukraine, the slowing down of European economies and the increase in raw material costs… The boat is still quite busy.

The engines that drove the Chinese economy are dying out, or at least losing their intensity. »

A quote from Philippe Aguignier, Associate Researcher in the Asia program at the Institut Montaigne

“An Erasing Effect”

In recent decades, China’s booming economy has fueled global growth. His delay will have been evident extinguishing effectargues Mr. Aguignier.

The slowdown will be reflected in particular in falling demand for commodities. Experts are therefore anticipating a drop in prices.

It’s a normalization in price, not a drop that would be painfulemphasizes Marc-Antoine Dumont.

Of course, exporting companies prefer higher prices, but in the current context where they are really high, we should not be concerned. »

A quote from Marc-Antoine Dumont, economist at Desjardins

In terms of goods exports, a slowdown in Chinese production will add to the already known supply chain problems. This could lead to longer delivery times and higher prices, thereby contributing to inflation in importing countries.

Workers make stuffed animals at a factory in Linyi, Shandong province.

Photo: Reuters/China Stringer Network

After all, foreign direct investment from China has stagnated since the pandemic began, confirms Alicia Garcia-Herrero. Emerging markets are likely to suffer the most as China is often their top lender.

We can see it slowing down and it’s not from this year, notes Philippe Aguignier. It’s been a year or two. However, these countries need these flows.

The threat is greater for developing countries. »

A quote from Philippe Aguignier, Associate Researcher in the Asia program at the Institut Montaigne

A new engine

According to Marc-Antoine Dumont, the Chinese economy could surprise us even if the situation looks bleak. China has shown us in the past that it is capable of a strong recoveryhe says.

If the pandemic is brought under control and domestic restrictions are lifted entirely, annual growth could be higher than expected, argues the World Bank in its latest update on China.

What is certain, however, is that global growth can no longer depend on China, notes Alicia Garcia-Herrero. We must look for new engines of growthshe argues using India as an example.

We must not abandon China, but we can no longer pretend that growth will come from there alone. »

A quote from Alicia Garcia-Herrero, researcher at the Bruegel Institute

Against this background, can China still claim to become a world power?

If the growth differential persists, the Chinese economy will eventually overtake the US economy, observes Ms. Garcia-Herrero. Even if Chinese growth is not as strong as in the past, it is still stronger than US growth.

The researcher believes that China will never be much more powerful than the USA. Around 2030, the two economies are expected to grow at a similar rate.

However, China has an advantage: the region in which it wields its influence, Southeast Asia, is much more dynamic and growing than that in which the United States is the dominant player.

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