China's economic slowdown amid global downturn

China's economy grew at a much slower pace in the second quarter this year by just about any measure -- GDP, exports or prices of goods and services combined with a slowing property market and rising youth unemployment. Overall, there has been slackening of demand both at home and abroad causing the economy to grow at a much slower speed than before the Covid pandemic.
The economic slowdown is also reflected in data on manufacturing activity - as indicated by the purchasing manager's index which has declined for four months in a row to July according to official statistics. Of particular concern is China's US$15.3 trillion local government debt with serious implications for financial markets and the economy.
Paul Krugman, however, in a recent article referring to the huge debt owed by local governments in China said that the debt in question is in essence money China owes to itself not to foreign creditors. Therefore, it is possible for the national government to resolve the crisis through some combination of bailout of debtors and haircuts for creditors.
Data released in July showed GDP expanded by only 0.8 per cent in June quarter as compared to the previous quarter. Official data released early in August revealed that exports in July had declined by 14.5 per cent in dollar terms year-on-year while imports dropped by 12.4 per cent. Sizeable declines in Chinese exports to Europe and the US played a major role in decline in June quarter data on exports.
A slowdown in economic growth in China and the likely emergence of a deflationary environment are leading to lower business and consumer confidence. According to the financial conglomerate Citigroup, core goods prices, which exclude food and energy costs, have entered a "deflationary phase because of weakening consumer demand". Some other analysts point out the simultaneous downturns in the country's two most important cyclical drivers, property and exports for the economy entering a deflationary phase.
Deflation is of concern because the lower the rate of inflation, the higher the real rate of interest, which will discourage investment. This is based on the qualifier, ceteris paribus, which is a Latin phrase that generally means "all other things being equal" which may not be the case always. Also, inflation edging downward does not threaten a deflationary spiral. As in the case of Japan over the last three decades, there has not been any tendency for the rate of deflation to accelerate. So, it is reasonable to assume that it is the case with China also.
A recent Wall Street Journal (WSJ) report noted three major areas of concern for the Chinese economy. They include slowdown in manufacturing activity, weakening housing market, and continuing deflation likely to cause serious damage to the economy if consumers try to save more in the expectation that their money will be worth more in the future.
A downward spiral in economic activity usually spreads to output, investment and jobs and leads to recession. But that is unlikely to happen in China now. While very low inflation is a concern, but China is not on the brink of a deflation because core inflation which is a better guide to underlying price pressures is still showing an upward trend, though it is very modest in size hovering much below 1 per cent year-on year.
Meanwhile, the People Bank of China (China's central Bank) has announced a 15-basis point cut in interest rate to 2.5 per cent, the biggest drop since the start of the pandemic. The cut was made in the wake of the official data released on August 15, on retail sales and manufacturing output which were both below those for June.
The Chines government is also in a difficult situation to take measures to stimulate the economy. The US Federal Reserve (the Fed) has been ramping up interest rates. High interest rates in the US create a magnet for liquidity around the world which has already resulted in the collapse of currencies in the developing world.
If the Peoples Bank of China (PBoC) does undertake quantitative easing now to stimulate the economy, much of that liquidity will move to the US. China will have very muted impact from its stimulus packages. Therefore, it is likely that the PBoC will wait for the Fed to start lowering rates before it makes any move. But that will only happen when the US economy enters recession.
More importantly, China's economy is still growing much faster than the US and other advanced economies despite Washington's concerted efforts to amplify whatever problem China is facing to discourage foreign investment, trade and any other economic engagements. The US corporate media is very actively complicit in pursuing this agenda.
In fact, the Chinese economy is expected to grow by 5 per cent this year, lowest since 1990 except for a sharp decline in 2020. So, if China's inflation moves below zero into the negative territory, it really does not matter. President Xi Jinping also indicated that China's economic growth must be based more on its own market expansion as opposed to exports.
It is also to be noted that the overall global economic climate is now very poor, and the EU is almost on the verge of recession, so also the US economy. Under such an economic climate, volume of trade and investment will decline with China further causing downward pressure on the Chinese economy.
While China's economic slowdown creates serious concerns for global economic growth, even with very modest growth in China relative to past years, the IMF estimated that China would account for around 35 per cent of global growth.
China's current problem is not deflation. That does not mean China's economy does not face difficulties. It does and contrary to what is published in the media, the decline in Chinese exports and economic slowdown is not just the result of low global growth and faltering global trade but the US economic warfare directed at China to undermine the Chinese economy, in particular Chinese high-tech industries.
China is now facing far more intense and broad ranging economic warfare than what Japan faced in the 1980s. The Plaza Accord (1985) led the yen dramatically increasing in value relative to the US dollar. The primary purpose of the Accord was to strengthen the yen so that Japanese exports would no longer be competitive in the global market.
The consequence of the Plaza Accord was that it paved the way for Japan's decades of continuing sluggish growth and deflation which is continuing. In 1981 Japanese car makers were also forced to limit exports of passenger cars to the United States under a unique programme titled "voluntary export restraint" (VER).
We are now at another global crossroads. China has become the second largest economy in the world. Largely due to its population size, its per capita income still significantly lags that of the US. Yet, the US has already enlisted help from its allies to stop another country to become a major economic power in the world.
US President Joe Biden has started to further escalate economic war against China. On August 9, he unveiled his latest sweeping measures in the US's economic war against China. In a presidential executive order, the Biden administration decreed to block US investment in high-tech Chinese companies with bans on Americans working in collaboration with them.
The proposal is designed to continue the administration's "small yard, high fence" approach to restrict the export of sensitive technologies to slow the pace of China's ability to develop AI. The US has also placed hundreds of millions of tariffs on the import of Chinese goods as part of a broader strategy to facilitate supply chain shifts.
Also, such a policy reorientation signals a profound shift in the US's economic policy. Since the early 1980s the US cheered on free trade and capital movement or what has been described as globalisation. But all that have changed now. Although globalisation brought enormous benefits in terms of enhanced efficiency gains and lower cost for consumers, the US efficiency alone is not enough, because of China's rise as an economic power.
Also, the massive subsidies under the current US administration to revitalise domestic manufacturing and to spur investment in new technologies are also an integral part of this policy notwithstanding the massive R&D handouts to US multinational and other large corporations for a very long time.
US industrial policy no longer wants to use trading relationships with China to foster new industries. Instead, the whole attempt is to beat back such competition using increasing levels of trade barriers. Economic self-reliance has become an essential element of national security, thereby deleveraging the enormous benefits of globalisation and free trade.
Now the US has formulated in broad economic terms its national security interest in terms how to contain China's economic rise which is viewed as the security risk. Therefore, the Biden administration moved towards more state interventions to strengthen the industrial base, labour force and defence capability. This is mostly about further enhancing its military capability. It is to be noted that as of July this year the United States has the strongest military force in the world and standing at the top among 145 countries, according to Global Firepower, a data website that tracks global defense-related information.
The sweeping measures include further enhanced tariffs, investment reviews and export bans on high grade computer chips and other advanced technologies. Such measures were adopted under the previous President Donald Trump now under President Biden. The bans introduced by the Biden Administration are very sweeping in scope. They are primarily designed to cripple China's ability to develop and compete in commercial as well as military high-tech applications. The US is also exerting pressure on its allies in Europe and Asia to follow suit. Overall, the idea is to expand the existing export ban to China and to limit China's ability to acquire US technology by restricting US investors to invest in strategic sectors in China.
US Secretary of Treasury Janet Yellen, on the heels of a trip to Beijing in early July, has travelled to India and Vietnam to canvass the benefits of what has been described as "friend shoring" signalling business executives to move away from China. She also said that building strong economic and security ties with Vietnam was a priority for the US.
In India she stressed the importance of further deepening the already existing significant bilateral ties, and President Biden last year also declared India as one of the US's indispensable partners. Some in the US even describe the US-India relationship as the defining partnership of the century. From the Indian perspective, the US sanctions against China could even hold advantages for India.
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