The economic dynamics of China are different from the US, but no more encouraging. It’s helpful to begin with a quick recap of Chinese economic performance over the past three years.
China’s approach to the pandemic during 2020–23 was radically different from the US. In the initial stages, both economies stupidly locked down (there’s no evidence that lockdowns work to stop the spread of airborne respiratory viruses — the virus goes where it wants), but the Chinese lockdowns were more extreme.
Transportation networks were closed. Entire neighbourhoods were forcibly transported to COVID concentration camps. Some individuals were bolted into their apartments with steel beams welded to the outside of their door frames. Bodies were incinerated en masse, and there’s some evidence that victims were burned alive.
In the US, this phase (in a less extreme form) ended by mid-2021 with the introduction of vaccines (they didn’t always work but did offer a public policy excuse to ease up lockdowns) and the wearing of masks (they also didn’t always work, but offered a psychological pacifier to the incurably insecure). At the same time, China didn’t ease up; they doubled down.
In mid-2022, entire cities like Shanghai (population 26 million) and Beijing (population 22 million) were shut down under the banner of zero-COVID. None of this had to do with public health. It was 100% political.
Xi Jinping was up for an unprecedented third term as dictator at a National Party Congress in November 2022. Once that Congress was over and Xi had cemented his role as the new Mao, the Chinese Communist Party (CCP) did a 180-degree turn. Zero-COVID was over, and the new policy was ‘let ‘er rip’. COVID infected hundreds of millions, over a million died (statistically the same as in other countries), and the population soon achieved herd immunity (again, the same as in other countries).
While this was playing out, the Chinese economy behaved as expected under the circumstances. There was a crash in mid-2020 (same as the US), a sharp recovery in late 2020 (again, same as the US), and weak growth in 2021. The divergence came in late 2022. The US showed strong growth in Q3 of 2022 (3.2%-plus) and Q4 of 2022 (2.6%-plus). China’s growth was higher on the whole but shockingly low for a major developing economy with high growth potential.
China’s growth recently has been 0.4% in Q2 of 2022, 3.9% in Q3 of 2022, 2.9% in Q4 of 2022, 4.5% in Q1 of 23 and 6.3% in Q2 of 23. Despite being below potential, these growth figures were strong enough to give rise to the ‘reopening’ narrative.
This is a typical Wall Street scam in which the end of zero-COVID and the achievement of herd immunity would put things back to normal in China and lead to an economic boom that would carry the world on its shoulders. Of course, Wall Street’s bottom line for every phoney narrative is ‘Buy stocks!’
The narrative was never true, and China is on track to underperform this year and perhaps fall into another recession. Even 3% growth in China should be treated as a recession because the official figures are inflated with wasted investment in fixed assets that would be written off to zero if any strict accounting method were used.
The truth is China’s problems pre-date the pandemic and are still around now that the pandemic is over. These include a high urban jobless rate, high youth unemployment (21.3%), astronomically high local debt (don’t be reassured by central government debt figures; the debt in China is stashed away in the provinces and banks), soft consumption, an unending wave of commercial real estate defaults, and the impact of economic sanctions including bans on exports of high-end semiconductors and equipment to China.
China is not an economic engine pulling the world economy out of a ditch. It’s more like a lead weight pulling the world economy underwater. This dynamic won’t change soon. In fact, it’s just getting started. If this was a ‘reopening’, it looks like a Broadway show that gets bad reviews and closes after one performance. The theatre is now dark.
All the best,
For The Daily Reckoning Australia