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The Chinese national flag in Beijing, China. Picture: REUTERS/THOMAS PETER
The Chinese national flag in Beijing, China. Picture: REUTERS/THOMAS PETER

It is said that when the US economy sneezes the rest of the world economy catches pneumonia. We have to wonder whether the same might not be said about the Chinese economy. After all, it is now the world’s second-largest.

Until recently it was also the main engine of world economic growth and the main driver of international commodity prices. Compounding matters, rather than simply sneezing, the Chinese economy seems to be on the cusp of pneumonia.

As a commodity exporter, SA, with the other commodity-dependent emerging market economies, is particularly vulnerable to an unfavourable Chinese economic outcome. Not only because a Chinese economic slowdown would have a meaningful effect on Chinese import demand and international commodity prices. Rather, it is because a Chinese slowdown could have important spillover effects for China’s Asian trade partners, Germany, Australia and the other commodity-dependent economies, which all have a high dependence on the Chinese market for their exports. That in turn could tip the world economy into recession.

The Chinese economy seems to be in the eye of a perfect economic storm. There is now every sign that the country’s outsize property and credit market bubble is bursting. If so, it will be doing so while the country has to contend with intensifying US trade restrictions and a slowing world economy.

Compounding matters have been the egregious economic policy mistakes made by President Xi Jinping, who has abrogated for himself the most economic power since the dark days of chair Mao Zedong. These mistakes include an economically disastrous zero-Covid-19 policy that shut down large parts of the economy, a confrontation with the country’s dynamic hi-tech sector, and the rolling back of some of Dao Xiaoping’s market-orientated economic reforms that helped put China on its earlier high economic growth path.

Japan’s 1990s experience, with a lost economic decade after the bursting of its property and credit market bubble, would seem to be particularly instructive for China’s likely long-run economic outlook. This is in part because China’s property and credit market bubble is estimated by the Bank for International Settlements as being at least of a comparable size to that which preceded Japan’s lost economic decade. It is also in part a consequence of China’s poor demographics, itself a result of that country’s earlier one-child policy. With China’s labour force already declining and expected to decline for as far as the eye can see, it is difficult to see how that country can possibly grow its way out from under its debt mountain.

Economic reforms

All of this makes it all too likely that China is well on its way to a Japanese-style lost economic decade. If that were indeed to occur the world would no longer be able to count on China as its main engine of economic growth. No longer too would the emerging market economies be able to count on China to keep international commodity prices well bid.

Even before the onset of China’s current economic crisis the IMF correctly underlined the need for fundamental economic reforms in SA, to revive its sclerotic economy. Those reforms included the need to improve the country’s energy and logistical constraints, as well as its public finances, reduce barriers to private sector investment, address structural rigidities in the labour market, and tackle crime and corruption.

By casting a dark shadow over the world’s long-term economic outlook the Chinese economic crisis adds urgency to the need for major SA economic reforms.

If there is a silver lining to the Chinese economic crisis it is that it will relieve world inflationary pressures, both by reducing global aggregate demand and by causing a decline in international commodity prices. That in turn will provide much-needed inflation relief to the rest of the world economy and limit the need for a prolonged period of high interest rates.

Lachman, a former deputy director in the IMF’s policy development & review department and chief emerging market economic strategist at Salomon Smith Barney, is a senior fellow of the American Enterprise Institute.

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