All monetary authorities in every corner of the world have pledged to raise interest rates to appease runaway inflation. All? no China is doing exactly the opposite.
Posted at 7:00 am
In late 2021, when it became clear that interest rates in most developed countries would have to rise to dampen rising prices, the People’s Bank of China began cutting rates.
The country is less affected by inflation, but not immune either. For the second time this year, a meteoric rise in the price of pork, a staple food for Chinese people, is forcing the government to draw on its strategic reserve of frozen meat to bring the price back to affordable prices for the people.
Inflation hurts China less because it hasn’t suffered as much as the rest of the world from rising energy prices since Russia invaded Ukraine.
In fact, the Chinese are taking advantage of this by buying oil and natural gas at a discount, which the Russians can no longer sell to Europe.
The world’s largest exporter also does not feel the expressed desire of its trading partners, traumatized by the pandemic, to reduce their dependence on products “Made in China”. At least not yet. According to figures from the United Nations Conference on Trade and Development (UNCTAD), China’s share of total world exports continues to rise.
Self inflicted wounds
The Chinese economy is slowing, but not for the same reasons as elsewhere in the world. The zero-COVID-19 policy that the Chinese president stubbornly adheres to is beginning to weigh heavily on growth. If Prime Minister François Legault was accused last week of being “the biggest detainer in North America,” China’s President Xi Jinping may well be considered the world’s greatest detainer. Whole cities with several million inhabitants are alternately padlocked and immobilized every time the virus is found.
On the eve of the party congress that is set to give him a third term, the Chinese president is showing no sign of easing health restrictions and repeated confinement.
The other weight weighing on China’s economy is the result of the government’s efforts to curb the property frenzy. With the great rural-to-urban migration of Chinese, housing construction fueled the country’s domestic growth for two decades. The real estate sector has grown and currently accounts for 20% to 30% of China’s GDP.
Empires were created, like Evergrande, which turned out to be a giant with feet of clay. The real estate bubble swelled to such an extent that the government decided to act. It reduced the borrowing capacity of real estate developers, and that turning of the screw triggered what could become the greatest real estate disaster of all time.
Two years after this steering wheel, the real estate market is still in a deep hole. Developers are strangled by debt, those who bought a home before it was built, as is customary in China, have stopped paying their mortgages for fear the work will never be completed, and those who wanted to own it , are now fleeing the market.
The crisis is so deep that the real estate sector could affect the entire Chinese economy unless there is a massive government injection of cash. The “word that starts with an R” (for recession), which is virtually unknown in China, is beginning to appear.
The Chinese economy escaped the recession that hit most countries around the world in 2020 and rebounded the following year with growth of 8.1%. Since the beginning of 2022, the slowdown has been severe: GDP grew by just 0.4% in the second quarter and growth forecasts for the year have been cut by most forecasters, including the International Monetary Fund.
Chinese growth is now expected to be 3% or less in 2022, which would be the weakest in 40 years. Notably, that’s a far cry from the 5.5 percent target set by Xi Jinping’s government, which is currently rowing against the tide but basically wants the same thing as everyone else, which is to avoid a recession.